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Risk and prudential glossary

RiskTAE’s risk and prudential glossary gives plain-English definitions of the capital, liquidity, resolution and governance terms that risk leaders at UK banks and building societies use. Each definition is drawn from its primary source (the PRA Rulebook, a PRA or Bank of England policy document, or a Basel Committee text) and links to our page on the subject where we have one.

B

Basel 3.1: The PRA’s name for the final Basel III reforms to how banks measure risk-weighted assets. The UK’s final rules were published in PS1/26 on 20 January 2026 and apply from 1 January 2027, apart from the internal model approach for market risk, which follows on 1 January 2028. Basel 3.1 advisory

C

Capital conservation buffer: A buffer of CET1 capital equal to 2.5% of a firm’s total risk exposure amount (Capital Buffers 2.1).
CET1 ratio: Common equity tier 1 capital as a percentage of a firm’s total risk exposure amount. The Pillar 1 minimum is 4.5% (Article 92).
Collective rebuttal: A Basel Committee term for a clearly enforceable law or regulation of general application that explicitly prohibits a bank from supporting an entity, which lets the bank exclude that entity from its step-in risk assessment. The PRA does not accept it as a ground for exclusion and treats such prohibitions as mitigants instead. Step-in risk advisory
Combined buffer: The sum of a firm’s capital conservation buffer and countercyclical capital buffer, plus any G-SII or O-SII buffer that applies to a global or other systemically important institution.
Conversion approach: A way of estimating a firm’s exposure to a step-in entity by applying a conversion factor to that entity’s assets. It is one of the responses in the Basel Committee’s 2017 step-in risk guidelines and in the PRA’s SS1/25. Step-in risk advisory
Conversion factor (CF): The percentage of an off-balance-sheet commitment that is treated as a credit exposure. Under the Basel 3.1 standardised approach, transaction-related contingent items take 20% and other commitments 40%, except UK residential mortgage commitments. Basel 3.1 advisory
Countercyclical capital buffer (CCyB): A buffer of CET1 capital whose rate the Financial Policy Committee sets to reflect risks in the credit cycle.
Credit risk mitigation (CRM): The recognition of collateral, guarantees and credit derivatives that reduce the capital a firm holds for credit risk. Basel 3.1 changes the treatment of funded and unfunded credit protection. Basel 3.1 advisory
CVA risk: The risk of losses from changes in credit valuation adjustments on derivatives and securities financing transactions. Under Basel 3.1 it is capitalised with the alternative (AA-CVA), basic (BA-CVA) or standardised (SA-CVA) approach, and the SDDT regime disapplies CVA risk capital. Basel 3.1 advisory

F

FRTB: The Fundamental Review of the Trading Book, the market risk framework within Basel 3.1. Its new standardised approaches and revised trading book boundary apply from 1 January 2027, and its new internal model approach from 1 January 2028. Basel 3.1 advisory

I

ICAAP: The internal capital adequacy assessment process: a firm’s own ongoing assessment of the capital it needs for the risks it faces, including stress testing. The PRA sets out its expectations in SS31/15, and SDDTs follow SS4/25 from 1 January 2027. ICAAP advisory
ILAAP: The internal liquidity adequacy assessment process: a firm’s process for identifying, measuring, managing and monitoring its liquidity. SDDTs use a simpler ILAAP template and generally face no Pillar 2 liquidity add-ons. Risk Advisory
IMA, ASA and SSA: The internal model approach, advanced standardised approach and simplified standardised approach to market risk capital under FRTB. The ASA or SSA applies from 1 January 2027, firms with existing IMA permissions may keep them for that interim year, and the new IMA starts on 1 January 2028. Basel 3.1 advisory
Impact tolerance: The maximum tolerable level of disruption to an important business service (Operational Resilience Part).
Important business service: A service a firm provides which, if disrupted, could threaten the firm’s safety and soundness or, for O-SIIs, UK financial stability (Operational Resilience Part).
Input floors: Minimum values for PD, LGD and EAD that firms must use in IRB models under Basel 3.1. PS1/26 corrected the retail LGD floor for the unsecured portion of a partially secured exposure to 30%. Basel 3.1 advisory
Interim Capital Regime (ICR): A planned opt-in regime, first proposed in CP16/22 as the Transitional Capital Regime, that would have let SDDT-eligible firms keep their existing capital requirements until the SDDT capital regime began. Once Basel 3.1 and the SDDT regime were aligned on 1 January 2027 it was no longer needed, and its rules were revoked on 20 January 2026 without ever taking effect. SDDT regime advisory
Internal Loss Multiplier (ILM): A scaling factor in the standardised approach for operational risk, based on a firm’s historical losses. The PRA sets it equal to one, so loss history does not change a UK firm’s Pillar 1 operational risk capital. Basel 3.1 advisory
Internal ratings based approach (IRB): Approaches that let a firm with PRA permission use its own estimates in credit risk capital: under foundation IRB (FIRB) it estimates PD, and under advanced IRB (AIRB) it also estimates LGD and EAD. Basel 3.1 removes IRB for central governments, central banks and equity, and removes AIRB for institutions, financial corporates and large corporates (annual revenue over £440 million on a three-year average). Basel 3.1 advisory
International subsidiary approach: A PRA permission under which certain UK subsidiaries of overseas groups use un-floored RWAs at UK consolidated level, leaving the output floor to apply at group level abroad. It is not open to ring-fenced bodies, and one condition is that the home jurisdiction has made specific and public proposals to implement the output floor. Basel 3.1 advisory
Investment grade (unrated corporates): Under the Basel 3.1 standardised approach, a firm with PRA permission can give an unrated corporate it assesses as investment grade a 65% risk weight and other unrated corporates 135%. Without that permission the default for unrated corporates is 100%. Basel 3.1 advisory
IPRE and HVCRE: Income-producing real estate and high-volatility commercial real estate, two sub-classes of specialised lending. From 1 January 2027, IPRE exposures under FIRB or AIRB move to the standardised approach unless the firm applies to use slotting. Basel 3.1 advisory
IRRBB: Interest rate risk in the banking book. SS31/15 names it as one of the risks the PRA assesses for Pillar 2A. ICAAP advisory

L

Leverage ratio: Tier 1 capital divided by a firm’s total exposure measure, expressed as a percentage (Leverage Ratio (CRR) Part, Article 429(2)).
Liquidity coverage ratio (LCR): A firm’s liquidity buffer divided by its net liquidity outflows over a 30-day stress period, which must be at least 100%.
Loan-splitting: The UK Basel 3.1 treatment of residential mortgages that are not materially dependent 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 rest takes the counterparty’s risk weight (Article 124F). Basel 3.1 advisory

M

Material outsourcing: Outsourcing so important that a failure in it would cast serious doubt on the firm continuing to meet its threshold conditions or the Fundamental Rules (PRA Glossary). Suppliers under material outsourcing arrangements count as unconsolidated entities for step-in risk. Step-in risk advisory
Materially dependent on cash flows: Real estate lending where repayment relies on income from the property, which attracts higher risk weights under Basel 3.1. Firms must assess all existing real estate exposures for material dependence by 1 January 2027. Basel 3.1 advisory
Maximum distributable amount (MDA): A rule-based cap on distributions that a firm must calculate when it does not meet its combined buffer (Capital Buffers 4.3). The Single Capital Buffer for SDDTs removes automatic MDA restrictions.
Modification by consent: The mechanism by which an eligible firm opts into the SDDT regime, chosen by the PRA so that eligible firms can stay outside it. By 13 October 2025, 56 firms had opted in out of around 80 the PRA estimated to be eligible (PS20/25). SDDT regime advisory
MREL: The minimum requirement for own funds and eligible liabilities, which the Bank of England sets so that a firm can be resolved.

N

Net stable funding ratio (NSFR): Available stable funding divided by required stable funding, which must be at least 100% (Article 428b). An SDDT with a high enough retail deposit ratio can meet stable funding standards without monitoring it.

O

Off-cycle review: The PRA’s one-off recalibration of firm-specific Pillar 2 capital to remove double counting between Pillar 1 and Pillar 2A arising from Basel 3.1. It also rebases variable Pillar 2A and the PRA buffer, and firms do not need to produce a full ICAAP for it. ICAAP advisory
Operational risk: In the Basel Committee’s words, “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.” Under Basel 3.1 a single standardised approach replaces the existing approaches to its Pillar 1 capital. Basel 3.1 advisory
Output floor: A limit that stops a firm’s modelled RWAs falling below 72.5% of the RWAs it would calculate using standardised approaches alone. In the UK it phases in at 60% in 2027, 65% in 2028 and 70% in 2029, reaching 72.5% on 1 January 2030. Basel 3.1 advisory
Overall financial adequacy rule: The PRA rule that a firm must at all times hold enough financial resources for its liabilities to be met as they fall due (Internal Capital Adequacy Assessment Part 2.1).

P

PD, LGD and EAD: Probability of default, loss given default and exposure at default, the main inputs to IRB credit risk models. PS1/26 moves the definitions of PD, LGD and conversion factor into the PRA Rulebook Glossary. Basel 3.1 advisory
Pillar 1: The minimum own funds requirements that rules set for every firm. Under Basel 3.1 they cover credit, market, CVA and operational risk, subject to the output floor.
Pillar 2A: Firm-specific capital the PRA requires above Pillar 1 for risks that Pillar 1 does not capture, or captures only in part. The PRA sets it through the SREP. ICAAP advisory
Pillar 2B: Capital for the risks a firm may face over a forward-looking horizon, including under stress (SS31/15). ICAAP advisory
Pillar 3: The public disclosure requirements on a firm’s capital, risks and RWAs. PS1/26 sets out updated Pillar 3 templates for Basel 3.1. Basel 3.1 advisory
PLAT and NMRF: The profit and loss attribution test and non-modellable risk factors, two elements of the FRTB internal model approach. The PRA consulted on changes to both in CP9/26, published on 19 June 2026. Basel 3.1 advisory
PRA buffer: A firm-specific capital buffer the PRA sets above the Total Capital Requirement and the combined buffer, sized so the firm can withstand a stress. For SDDTs the Single Capital Buffer replaces it from 1 January 2027. ICAAP advisory
Preferred resolution strategy: The Bank of England’s planned approach to resolving a failing firm: bail-in, transfer or modified insolvency. The Bank’s MREL statement of policy says firms with more than £40 billion of total assets should expect bail-in.

R

Recovery plan: A firm’s plan of the measures it could take to restore its financial position after a significant deterioration (Recovery Plans Part 2.2). RisKIT recovery planning model
Refined methodology: A Pillar 2A credit risk offset that the PRA retires for all firms from 1 January 2027 (PS2/26). ICAAP advisory
Residual risk add-on (RRAO): An add-on within the FRTB advanced standardised approach. UK firms can apply for a permission where it is disproportionate, and permission holders should reflect relevant changes in their Pillar 2A calculation. Basel 3.1 advisory
Retail deposit ratio (RDR): A measure of an SDDT’s retail funding. An SDDT whose four-quarter moving average RDR is above 50% for four consecutive quarters can meet stable funding standards without monitoring the NSFR (PS15/23). SDDT regime advisory
Reverse stress test: A test that runs a firm’s business plan to failure to find the scenarios that would make it unviable (Internal Capital Adequacy Assessment Part). For SDDTs, PS4/26 changed how often it must be run, with effect from 20 January 2026. ICAAP advisory
Risk-weighted assets (RWAs): A firm’s exposures adjusted for their risk, which form the denominator of its risk-based capital ratios. Basel 3.1 changes how they are measured. Basel 3.1 advisory

S

SCRA: The standardised credit risk assessment approach, which grades unrated bank exposures A, B or C for risk-weighting under the Basel 3.1 standardised approach. Basel 3.1 advisory
SDDT: A small domestic deposit taker: a UK bank or building society that meets the PRA’s SDDT criteria and has accepted the PRA’s modification to join the regime. The criteria include average total assets of no more than £20 billion, a 36-month average of at least 85% of relevant credit exposures in the UK, and no use of IRB. SDDT regime advisory
Single Capital Buffer (SCB): One non-cyclical capital buffer for SDDTs that replaces the capital conservation buffer, the CCyB and the PRA buffer from 1 January 2027, without automatic MDA restrictions. The PRA will set it at no lower than 3.5% of RWAs, and each firm’s own figure is confidential. SDDT regime advisory
SME and infrastructure lending adjustments: Firm-specific Pillar 2A adjustments that replace the SME and infrastructure support factors removed from Pillar 1 under Basel 3.1, so that removing them does not increase overall capital requirements (PS7/25). Basel 3.1 advisory
SMF1, SMF2 and SMF24: The Chief Executive, Chief Finance and Chief Operations functions in the PRA’s Senior Management Functions Part.
SMF4: The Chief Risk function: responsibility for the overall management of a firm’s risk controls and for reporting to the board on risk (PRA Senior Management Functions Part). Chief risk officer search
SMF5 and SMF9: The Head of Internal Audit function and the Chair of the Governing Body function in the PRA’s Senior Management Functions Part.
SMF10: The Chair of Risk Committee function in the PRA’s Senior Management Functions Part. Risk committee chair search
Solvent exit: The process by which a firm stops carrying on PRA-regulated activities while remaining solvent. SS2/24 sets out the PRA’s expectations for solvent exit planning by non-systemic banks and building societies.
Specialised lending and slotting: Specialised lending covers project finance, object finance, commodities finance and income-producing real estate, which IRB firms may risk-weight using supervisory slotting categories. Basel 3.1 cuts the slotting risk weight for “substantially stronger” project finance to 50%. Basel 3.1 advisory
SREP: The supervisory review and evaluation process: the PRA’s review of a firm’s ICAAP and risks, which it uses to set the firm’s Pillar 2 capital. ICAAP advisory
SSPE: A securitisation special purpose entity. SSPEs are named in the PRA Glossary as unconsolidated entities for step-in risk, but a firm need not identify one where it holds only a senior position and is not the original lender, originator or sponsor (Step-in Risk 6.2). Step-in risk advisory
Standardised approach for credit risk (SA-CR): Risk weights set by the regulator for credit exposures, which Basel 3.1 makes more risk-sensitive for residential mortgages, corporates and SMEs, among others. It also requires firms to revalue a property when they estimate its value has fallen by more than 10% since the last valuation. Basel 3.1 advisory
Standardised approach for operational risk: The single Basel 3.1 approach to operational risk capital, which replaces the existing approaches. It multiplies the Business Indicator, a proxy taken from the financial statements, by marginal coefficients of 12% up to £0.88bn, 15% from £0.88bn to £26bn and 18% above £26bn to give the Business Indicator Component (BIC). Basel 3.1 advisory
Standardised Measurement Approach (SMA): The name the Basel Committee used in its consultation of 4 March 2016 for what became the standardised approach for operational risk. Basel 3.1 advisory
Step-in entity: An unconsolidated entity that a firm must identify under Step-in Risk 6.1(1), for example because it sponsors the entity or invests in it. A step-in entity is immaterial if support to it would not materially affect the firm’s capital or liquidity, and material otherwise. Step-in risk advisory
Step-in risk: The risk that a firm provides financial support to a step-in entity in stressed conditions, without or beyond any contractual obligation to do so. In the UK the Step-in Risk Part of the PRA Rulebook and SS1/25 apply from 1 January 2026 to firms that are not SDDTs. Step-in risk advisory
Step-in sponsor: A firm that manages or advises an unconsolidated entity, places its securities, or provides it with liquidity or credit enhancement (Step-in Risk 1.2). Step-in risk advisory
Strong and Simple Framework: The PRA’s initiative to build a simpler prudential regime for small domestic deposit takers. Its capital regime, set out in PS4/26 on 20 January 2026, takes effect on 1 January 2027. SDDT regime advisory

T

Tier 1 and total capital ratios: Tier 1 capital and total capital, each as a percentage of total risk exposure amount. The Pillar 1 minimums are 6% and 8% respectively (Article 92).
Total Capital Requirement (TCR): Pillar 1 plus Pillar 2A capital requirements, as the term is used in SS31/15. It shares its initials with the Transitional Capital Regime, the 2022 name for what became the Interim Capital Regime. ICAAP advisory
Total risk exposure amount (TREA): The RWA figure a firm uses for its capital ratios, including any uplift from the output floor. Under Basel 3.1 it is the higher of U-TREA and the floor, which is a set percentage of S-TREA plus an adjustment for accounting provisions (Article 92(2A)). Basel 3.1 advisory

U

U-TREA and S-TREA: U-TREA is a firm’s un-floored RWAs using the approaches it has approval for; S-TREA is the same exposures recalculated using standardised approaches only. The output floor compares the two. Basel 3.1 advisory
Unconsolidated entity: An undertaking outside a firm’s regulatory consolidation, such as an SSPE, an asset management company or a supplier under a material outsourcing arrangement (PRA Glossary). Step-in risk advisory

Sources, checked on 29 September 2026: PRA Rulebook Glossary and the PRA Rulebook Parts named in each definition; PRA PS1/26 Implementation of Basel 3.1: final rules, 20 January 2026; PRA PS4/26 The Strong and Simple Framework, 20 January 2026; PRA PS9/24, 12 September 2024; PRA PS5/25, 22 April 2025 and SS1/25 Step-in Risk; PRA SS31/15 The ICAAP and the SREP; Bank of England MREL statement of policy, July 2025; BCBS, Basel III: Finalising post-crisis reforms, December 2017; BCBS, Guidelines: Identification and management of step-in risk, October 2017.

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