What Basel 3.1 changes for UK banks on 1 January 2027

Basel 3.1 is the PRA’s version of the final Basel III reforms to how banks measure risk-weighted assets. It applies to UK banks and building societies from 1 January 2027 under PS1/26. Standardised approaches become more risk-sensitive, and a phased output floor will stop modelled risk-weighted assets falling below 72.5% of the standardised figure from 1 January 2030.

What is Basel 3.1?

The Basel Committee published the standards in December 2017 as Basel III: Finalising post-crisis reforms. The PRA says they cover the measurement of risk-weighted assets (RWAs), the denominator of risk-based capital ratios, and calls its version the Basel 3.1 standards. Basel IV is a common informal name for the package, though the Basel Committee’s own title presents it as the completion of Basel III. Other jurisdictions implement it under their own names.

The UK start date moved three times. CP16/22 proposed 1 January 2025 in November 2022. PS17/23 moved it to 1 July 2025, it slipped to 1 January 2026 with PS9/24 in September 2024, and in January 2025 the PRA settled on 1 January 2027, shortening the transition so that full implementation stayed at 1 January 2030. The final rules in PS1/26, published on 20 January 2026, made no substantive change to the near-final ones except for market risk.

When does Basel 3.1 apply?

PS1/26 brings the Basel 3.1 rules and supporting policy into force on 1 January 2027, with one exception: the internal model approach for market risk starts on 1 January 2028. The Basel 3.1 reporting requirements also apply from 1 January 2027, and Pillar 3 disclosures move to updated templates.

The rules cover PRA-authorised banks and building societies, PRA-designated investment firms and approved or designated financial holding companies. Firms in the regime for small domestic deposit takers apply the SDDT capital regime instead. It starts the same day and builds its Pillar 1 on the Basel 3.1 standardised approaches for credit and operational risk, with simplifications. As both regimes now start together, the PRA revoked the Interim Capital Regime in January 2026 before it ever operated.

What changes for credit risk?

For residential mortgages where repayment does not depend materially on cash flows from the property, the part of the loan up to 55% of the property value takes a 20% risk weight and the remainder takes the borrower’s risk weight. Where repayment does depend materially on those cash flows, one risk weight applies to the whole loan, ranging from 30% for a loan-to-value ratio of 50% or less to 105% where it exceeds 100%.

Unrated corporates default to 100%. With PRA permission, a firm can instead assign 65% to those it assesses as investment grade and 135% to the rest. Unrated SME corporates outside retail take 85%. Conversion factors change as well, with 20% for transaction-related contingent items and 40% for other commitments, UK residential mortgage commitments excepted.

Internal ratings based (IRB) firms lose some permissions. Advanced IRB goes for institutions, financial corporates and large corporates (annual revenue above £440 million on a three-year average), and IRB goes entirely for equity and for central governments and central banks. Input floors apply to PD, LGD and EAD. Income-producing real estate on IRB moves to the standardised approach unless the firm applies for slotting, and the approval standard for models moves from full to material compliance.

The task most likely to run late is a data one. PS1/26 requires an assessment of every existing real estate exposure for material dependence on property cash flows by 1 January 2027, and a revaluation whenever a firm estimates a fall of more than 10% since the last valuation. Whether a borrower repays from rental income often sits in an underwriting file rather than a field the capital engine can read, so the work starts in the loan files.

What happened to the SME and infrastructure support factors?

Both leave Pillar 1. The PRA replaced them with firm-specific Pillar 2A adjustments for SME and infrastructure lending, set out in near-final form in PS7/25 in May 2025 and confirmed in PS1/26. Its stated aim is that removal “does not result in an increase in overall capital requirements”. The slotting risk weight for substantially stronger project finance also falls to 50%.

With the support now in Pillar 2A, Pillar 1 RWAs on these books lose the reduction the factors used to give. A board pack built on RWAs alone will miss the offset, so the ICAAP and the capital plan should show the two together.

What about operational and market risk?

A single standardised approach replaces the existing ones for operational risk. Capital is driven by the Business Indicator, a proxy taken from the financial statements, with marginal coefficients of 12% up to £0.88bn, 15% from £0.88bn to £26bn, and 18% above that. The PRA has set the internal loss multiplier at one, so a firm’s own loss history does not scale the Pillar 1 figure.

Market risk moves to the Fundamental Review of the Trading Book (FRTB). From 1 January 2027 firms use the advanced or simplified standardised approach (ASA or SSA) under a new trading book boundary. Existing internal model (IMA) permissions can be kept for that interim year, with other positions going to the ASA, and they cease automatically when the new internal model approach starts on 1 January 2028.

How does the output floor work?

The output floor limits how far internal models can reduce risk-weighted assets. A firm calculates its total risk exposure amount twice, with its approved approaches (U-TREA) and with standardised approaches only (S-TREA). It then uses the higher of U-TREA and a set percentage of S-TREA, adjusted for the different treatment of accounting provisions under the two approaches.

The floor applies individually to a stand-alone UK institution and to a ring-fenced body outside a sub-consolidation group, at sub-consolidated level to a ring-fenced body inside one, and at consolidated level to a CRR consolidation entity that is not an international subsidiary. UK subsidiaries of overseas groups can seek PRA permission for the international subsidiary approach, which ring-fenced bodies cannot use.

A firm on standardised approaches throughout gets the same figure both ways, so the floor has nothing to bite on. For firms using internal models it tightens every 1 January until 2030, and a capital plan that looks beyond 2027 has to project it at each year’s factor rather than at 60%. The PRA has said it will rebase Pillar 2 during the transition so that floor-driven RWA increases do not raise Pillar 2A where the underlying risk is unchanged.

Will capital requirements go up?

In PS9/24 the PRA estimated that Tier 1 capital requirements for major UK banks “are likely to increase by less than 1% by 1 January 2030”. An aggregate for the largest firms says little about any one bank. Its own delta turns on the loan-to-value mix of its mortgages, its unrated corporate and SME lending, the IRB permissions it loses and how far its modelled RWAs sit below the standardised figure.

Pillar 2 moves too. An off-cycle PRA review will adjust Pillar 2 for double counting with Pillar 1 and rebase variable Pillar 2A and the PRA buffer, with no full ICAAP needed. PS2/26 retires the refined methodology from 1 January 2027, and PS15/26 removes the benchmarking methodology, IRB benchmarks included, from the same date. Both came after the near-final rules, so a delta estimated in 2024 needs running again.

What should a bank do before 1 January 2027?

With the final quarter of 2026 under way, the aim is a capital number the board can rely on. We would start here:

• Run current rules and Basel 3.1 in parallel on the same reference date, and repeat the run as the book moves. Each repeat exposes data gaps before they reach a regulatory return.
• Finish the material dependence assessment of existing real estate exposures.
• Map each IRB portfolio against the new permission scope and agree what moves to the standardised approach or to slotting.
• Rebuild the ICAAP capital plan on a Basel 3.1 basis, with the floor at each year’s factor and Pillar 2A on the new methodologies.
• Take the delta to ExCo and the board with a reconciliation from today’s figure, so directors can challenge each movement.

SDDTs face much of the same credit and operational risk work, because their Pillar 1 rests on the same standardised approaches. The RisKIT ICAAP model comes in Basel III and Basel 3.1 versions, both open Excel, so the same portfolio can be run under each set of rules. If your parallel run has not started, our Basel 3.1 service begins with a 30-minute scoping call.

This article updates the author’s two pieces from September 2024, written before the final rules, for the rules the PRA published in PS1/26.

Questions readers ask

Is Basel 3.1 the same as Basel IV?

Yes. Basel IV is a common informal name for the same package. The Basel Committee’s title, Basel III: Finalising post-crisis reforms (December 2017), presents it as the completion of Basel III, and the PRA calls its version the Basel 3.1 standards.

When does Basel 3.1 start in the UK?

On 1 January 2027 under PS1/26, apart from the internal model approach for market risk, which starts on 1 January 2028. The output floor phases in from 60% in 2027 to 72.5% from 1 January 2030.

Does Basel 3.1 apply to smaller banks?

Firms in the regime for small domestic deposit takers apply the SDDT capital regime instead. It starts the same day and builds its Pillar 1 on the Basel 3.1 standardised approaches for credit and operational risk, with simplifications.

Does the output floor affect banks on the standardised approach?

No. A firm on standardised approaches throughout gets the same figure both ways, so the floor has nothing to bite on. It matters for firms using internal models, and it tightens every 1 January until 2030.

Sources: PRA PS1/26, Implementation of Basel 3.1: final rules (20 January 2026); PS1/26 Appendix 1, rule instrument; PS9/24 (12 September 2024); PS17/23 (12 December 2023); CP16/22 (30 November 2022); PRA delay announcement (17 January 2025); PS7/25 (22 May 2025); PS2/26 (20 January 2026); PS15/26 (28 May 2026); PS4/26 (20 January 2026); BCBS, Basel III: Finalising post-crisis reforms (7 December 2017).