Basel 3.1: what changes for UK banks in 2027

In January 2026 the Prudential Regulation Authority (PRA) published its final Basel 3.1 rules. The date has slipped twice, from 2025 to 2026 and then to 2027, but this time the PRA has issued a rulebook rather than a proposal, which puts firms on a different footing from the previous two deferrals. UK banks now have a fixed date to work to: 1 January 2027.

What changes on that date is the arithmetic behind a bank’s capital requirement. Risk-weighted assets (RWA) are the measure that scales required capital to how risky a bank’s lending is. Under the revised rules they are recalculated, and the range of exposures a bank may model for itself is cut back. For most firms that means a substantial body of remediation work.

What is Basel 3.1, and who wrote it?

Basel 3.1 begins with the Basel Committee on Banking Supervision (BCBS), the global standard-setter for banking regulation. It is a committee of central bank governors and bank supervisors drawn from the major financial jurisdictions. It meets at the Bank for International Settlements (BIS) in Basel, Switzerland, which is why its rules are called "Basel" standards.

After the 2008 financial crisis, banks using their own internal ratings-based (IRB) models to calculate how much capital they needed were producing vastly different answers for similar portfolios. The Basel Committee said as much when it published the fix, describing the reforms as aimed at "reducing excessive RWA variability" and committing to keep monitoring how well they do it.¹ That RWA variability meant banks with better (and often larger) risk modelling or quant divisions had lower capital requirement ratios and hence lower risk-weights.

The fix was published in "BCBS d424", also known as "Basel 3.1" or "Basel IV". It introduced three major changes:

1. Output floor. A bank using internal models cannot calculate a capital requirement below 72.5% of what BCBS’s standardised approach would give. This caps the capital saving a bank can get from its own models.
2. IRB restrictions. Banks can no longer use their own models for exposures to large corporates (those with turnover above £440 million) and financial institutions, though Foundation IRB remains available for both. Equity exposures lose internal models altogether: d424 provides that "all equity exposures are subject to the standardised approach".¹
3. Parameter floors. For portfolios where IRB is still permitted, minimum floors on submodels were set, so models cannot produce implausibly optimistic inputs to drive lower capital requirements.

So while the BCBS writes the screenplay, the PRA directs the UK production. It takes the BCBS script and translates it into rules that UK banks are legally required to follow. It does this through three avenues.

The table below shows the timeline of the PRA’s consultation process, from first proposals to a final rulebook.

The output floor: flooring for a level picture

The 72.5% output floor is the structural centrepiece of Basel 3.1. The output floor ensures that RWAs calculated using internal ratings-based (IRB) models cannot fall below 72.5% of the standardised approach (SA) equivalent RWAs.

Three quantities of total risk-weighted assets (TRWA) do the work: S-TRWA (the standardised total), U-TRWA (the unfloored modelled total), and TRWA itself (the reported total). TRWA is whichever is higher: U-TRWA, or 72.5% of S-TRWA.

The floor is not imposed in full from day one. PS1/26 phases the floor in from 1 January 2027, stepping it up each year until it reaches its fully loaded 72.5% on 1 January 2030.² The UK path derives from a Basel calibration that steps up annually: d424 sets the floor at "50%" on first application, then 55, 60, 65, 70 and finally "72.5%", a 2.5-point last step rather than a five-point one.¹ The runway is intended to give banks time to absorb the capital impact through time rather than scrambling to do a once-off balance-sheet adjustment.

Ultimately, the 72.5% output floor means banks cannot model their way to lower capital. A bank with highly optimised internal models that would otherwise produce low RWAs gets pulled back up to 72.5% of the standardised value. In practice, this caps the capital savings available from the IRB approach, which directly affects return on equity calculations and the business case for maintaining complex internal model infrastructure.

A new cast: which exposures keep internal models

The IRB approach still remains in Basel 3.1 but its scope is significantly reduced and input floors tightened.

Equity exposures are removed from IRB eligibility entirely and must be treated under the standardised approach: for that class there is no IRB option at all.¹

Basel 3.1’s IRB restrictions confine the full Advanced IRB benefit to retail portfolios, other general corporates, and certain specialised lending sub-classes.

What changes for credit, market and operational risk?

The credit risk SA is the most revised part, with risk weights that are more sensitive to borrower type and collateral quality.

• Small and medium-sized enterprises that fail the retail criteria fall into the corporate class, where unrated exposures carry a preferential SME weight below the general unrated-corporate weight.³
• Residential real estate risk weights are now segmented by loan-to-value (LTV) bands.

Counterparty credit risk follows the same pattern, and our guide to counterparty credit risk sets out the governance behind that capital number.⁴ The Internal Model Method (IMM), which lets banks model exposure at default on derivatives and securities financing transactions, is retained, with tightened permission conditions. Because the floor bites on total risk-weighted assets rather than on each risk type separately, modelled counterparty exposure feeds the same calculation.

The Fundamental Review of the Trading Book (FRTB) is the market risk portion of Basel 3.1, and our FRTB guide covers the standardised-versus-internal-models choice it forces.⁵

The FRTB replaces the pre-financial crisis market risk framework with a clearer trading-book boundary and three tiered approaches:

1. The Simplified Standardised Approach (SSA) is for banks with straightforward, limited trading activity. It uses simple, pre-set risk weights applied to broad categories of exposure. It is the least data-intensive option and is designed for firms where market risk is not a significant part of the business.
2. The Advanced Standardised Approach (ASA) is for banks with more active trading books that do not have, or do not want, supervisory approval for internal models. It calculates capital by measuring how sensitive each position is to changes in market factors (interest rates, credit spreads, equities, foreign exchange, and commodities) and aggregating those sensitivities using regulatory correlation assumptions.
3. The new FRTB-IMA (Internal Models Approach) is for banks that have received supervisory approval to use their own models.

The ASA and SSA come into force on 1 January 2027. The IMA follows a year later, on 1 January 2028.

Operational risk moves to a single standardised approach based on the business indicator: a three-year simple average of income and expense components calculated at the firm’s financial year end. The existing set of approaches, including the Advanced Measurement Approach (AMA), is withdrawn.

Rewriting where the rules live

Basel 3.1 is not the only reason UK capital rules change in 2027. Before Brexit, the Capital Requirements Regulation (CRR) sat alongside the PRA Rulebook as a separate but equally binding source of rules, and firms read both together. The CRR survived Brexit intact, which left the PRA unable to amend rules sitting in EU legislation as freely as it amends its own. So the PRA is moving the CRR’s rules across, in phases, timed to land with Basel 3.1 rather than disrupt firms twice.

Five policy statements land the change: three move the CRR across, and two make separate changes that arrive on the same day.

• PS12/25 (already in force since January 2026): capital definitions, own funds, and ECAI mapping.
• PS3/26 (in force January 2027): the CRR restatement, carrying the credit risk supervisory statements and securitisation requirements into the Rulebook.⁶
• PS14/26 (in force January 2027): the remaining CRR definitions, less the PD, LGD and conversion-factor definitions, which were carved out into PS1/26.
• PS4/26 (in force January 2027): the Strong and Simple regime, which takes small domestic deposit takers out of the full Basel 3.1 scope entirely.⁷
• PS15/26 (in force January 2027): phase one of the Pillar 2A review, adjusting Pillar 2A alongside the Pillar 1 changes so the two do not double-count.⁸

PS1/26 rewrites many of the same rules under Basel 3.1, and all of it takes effect on the same day, 1 January 2027.³ Policy statements explain what changed and why; the Rulebook is what you comply with. From January 2027 the Rulebook carries them all, and it is the only document a firm needs to read.

Curtain call for UK banks

The Basel standard was finalised in December 2017; the UK’s implementation of it has been in development since 2022. BCBS d424 was the screenplay, the PRA’s consultation cycle was the production process, and PS1/26 is the locked script. What UK banks receive now is not a draft but a finalised rulebook.

From 1 January 2027, the savings that banks could get from their own capital models are capped, with those models accepted in fewer places. The standardised approaches around them arrive in revised form. And the CRR moves into the PRA Rulebook, so a UK bank’s capital rules are both rewritten and re-homed on the same day. The only remaining part is how well-prepared UK banks are when the PRA calls action.

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