Systematic methodologies
The PRA will replace its current benchmarking approach with systematic methodologies for certain sovereign and sub-sovereign exposures, as well as for Unconditionally Cancellable Commitments (UCCs). These methodologies introduce minimum effective risk weights and conversion factors to ensure exposures benefiting from preferential Pillar 1 treatment are appropriately capitalised.
Credit scenarios in the ICAAP
Firms will be required to incorporate severe credit scenarios into their Internal Capital Adequacy Assessment Process (ICAAP). These scenarios should capture idiosyncratic risks and complement the systematic methodologies and are now considered mandatory under CP12/25. The PRA will assess Pillar 2A add-ons based on the higher of the capital implied by these scenarios or the systematic components, while allowing whole balance sheet netting where justified.
Reporting simplification
The PRA proposes to streamline reporting by reducing the scope of FSA076 (PRA regulatory return: Credit Risk Data) and decommissioning FSA077 (Credit risk: Additional data) and FSA082 (Credit risk: Stress testing data). This will reduce data submission requirements and align reporting with the revised methodologies.
Overall, these changes aim to strengthen risk sensitivity, improve supervisory consistency and reduce unnecessary reporting burdens while maintaining flexibility for firms to evidence their risk profiles. Firms should expect the tone and focus of the PRA credit risk reviews to shift, with new emphasis on regulatory reviews, and a larger focus on stress testing and scenario expectations.
Operational risk
The PRA intends to maintain its existing Pillar 2A operational risk methodology following the introduction of the Basel 3.1 SA, whereby the clearer guidance will tighten expectations and lead to firm‑specific recalibration where frameworks are weak. Large firms will continue to face high scrutiny, but the clarified standards may draw more PRA attention to the smaller firms that have had lighter operational risk assessments in the past.
Key proposals include:
Scenario analysis expectations
The PRA will set clearer expectations for all firms’ ICAAP scenario analysis, requiring the assessment of severe, low-frequency events and the provision of minimum information on operational risk management, scenarios considered and historical loss data. Firms must tailor analysis to their specific risk profile.
Transparency in Pillar 2A determination
The PRA will clarify the factors informing its Pillar 2A assessments across all firms, including business model characteristics, ICAAP analysis quality, supervisory insights and peer comparisons. Terminology will be updated to refer consistently to “significant firms.”
Good practices for significant firms
To replace the role previously played by Advanced Measurement Approach (AMA) standards, the PRA will set out good-practice expectations for significant firms’ operational risk measurement frameworks. Where such practices are met, the PRA may place greater reliance on firms’ ICAAPs.
Reporting clarifications
The PRA will retain the FSA072–075 templates but remove AMA-specific instructions and make minor clarifications. These templates remain complementary to Basel 3.1 Pillar 1 reporting.
The PRA expects overall operational risk capital levels to remain broadly stable, though the balance between Pillar 1 and Pillar 2A may shift under the revised framework.
Market risk & counterparty credit risk
The PRA is not changing its underlying Pillar 2A methodologies for market or counterparty credit risk, but is instead enhancing transparency. These improvements include:
Market risk
- Clarified assessment approach for illiquid, concentrated and one-way risks not fully captured in Pillar 1.
- Updated ICAAP reporting expectations outlining the minimum information firms must provide.
Counterparty credit risk
- Expanded guidance on counterparty risks that may require Pillar 2A add-ons, including residual CRM risks, wrong-way risk, CCP and settlement risks.
- Clearer expectations on firms’ identification and assessment of residual risks, along with updated ICAAP reporting requirements.
Data collection exercise
The PRA’s Basel 3.1 data collection exercise was conducted to support an off-cycle review of firm-specific Pillar 2 capital requirements. This is to ensure that changes to Pillar 1 risk weighted assets (RWAs) under Basel 3.1 do not result in unintended or duplicative adjustments to Pillar 2A capital where underlying risks remain unchanged. On March 2026, firms were required to submit detailed quantitative templates to enable the PRA to recalibrate variable Pillar 2A requirements and the PRA buffer in line with the new Basel 3.1 framework. With templates now submitted, firms should expect clarification questions from the PRA in the next quarter of 2026. Later in the year, firms may see more ICAAP linked supervisory conversations related to key RWA movements, drivers of these movements and implications for the capital stack.
How can Forvis Mazars help you?
Our experts can support your firm's Basel 3.1 or SDDT journey with services focused to:
- Develop and enhance Pillar 2A assessment frameworks
We can assist firms in interpreting and embedding the PRA’s revised expectations into a coherent Pillar 2A assessment methodology. This includes updating internal processes, capital methodologies, governance arrangements and documentation to ensure alignment with the new regulatory standards. - Advise on credit scenario design and stress testing enhancements
We can support firms in designing, calibrating and validating credit risk scenarios that meet the PRA’s enhanced requirements. This includes ensuring scenarios capture high severity tail events, idiosyncratic risk drivers and the necessary severity to satisfy the PRA’s expectations for credit scenario analysis in ICAAPs. - Assess overall capital impact under the new capital regime
We can perform a holistic analysis of the firm’s capital position under the revised Pillar 2A framework, including impacts arising from new systematic methodologies, enhanced scenario expectations and updated reporting requirements. This includes quantifying shifts between Pillar 1 and Pillar 2A capital, evaluating sensitivities under alternative assumptions and identifying potential capital optimisation opportunities within the confines of regulatory expectations.
Get in touch
Basel 3.1: Final rules key focus
The Prudential Regulation Authority (PRA) has now published the final Basel 3.1 rules in Policy Statement PS1/26, marking the completion of one of the most significant overhauls of the UK capital framework in over a decade.
Basel 3.1: Are you ready for the new rules?
The delay in implementation of Basel 3.1 offers banks a valuable window to recalibrate compliance strategies, strengthen system capabilities, and position themselves to navigate the complexities of the new framework with confidence.
Understanding Basel 3.1
On 1 January 2027, the Prudential Regulation Authority (PRA) is implementing the biggest changes to the capital regime for banks in over a decade. This reform package is commonly known as Basel 3.1.
Small Domestic Deposit Takers (SDDT) Regime
The PRA is introducing a more proportionate prudential regime for less systemically important banks and building societies. This will be known as the ‘Small Domestic Deposit Takers’ regime.
Key contacts
Shalini Maharaj London
Oliver Phillips Associate Director - Banking Risk Consulting - London
Huseyin Sahin Partner - Banking Risk Consulting - London
Hao Zheng London
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