From 1 January 2027 an ICAAP has to be written on a Basel 3.1 basis. The PRA set this out in PS15/26: ICAAPs signed off by boards in 2026 should include an impact assessment of Basel 3.1, and those signed off from 1 January 2027 “should be prepared on a Basel 3.1 basis”, including the Pillar 2A changes that take effect the same day. For most banks and building societies the next ICAAP rebuilds Pillar 1, Pillar 2A and the capital plan in a single cycle.
Which ICAAP is the first one on a Basel 3.1 basis?
The first one your board signs after 31 December 2026. The test in PS15/26 paragraph 6.5 is the date of sign-off, not the reference date, so an ICAAP with a 31 December 2026 reference date that goes to the board in March 2027 has to present the new basis. An ICAAP approved during 2026 carries an impact assessment instead, which means the Basel 3.1 numbers have to be run this year either way.
Key dates for moving the ICAAP to a Basel 3.1 basis
- PS1/26 published, bringing the Basel 3.1 rules into force on 1 January 2027.
- PS15/26 published, finalising the first phase of the Pillar 2A review and moving all of it to 1 January 2027.
- During 2026ICAAPs signed off by boards in 2026 should include an impact assessment of Basel 3.1.
- Basel 3.1, the Pillar 2A changes and the new SS31/15 take effect; ICAAPs signed off from that date are on the new basis.
- The internal model approach for market risk applies.
Three documents set the timetable. PS1/26, published on 20 January 2026, brings the Basel 3.1 rules into force on 1 January 2027, apart from the internal model approach for market risk, which follows on 1 January 2028. PS15/26, published on 28 May 2026, finalises the first phase of the PRA’s Pillar 2A review and moves all of it to 1 January 2027. And SS31/15, the PRA’s statement on the ICAAP and the SREP, has a new version that takes effect on the same day.
What changes in the Pillar 1 numbers?
Almost every line of a standardised firm’s risk-weighted assets, and the output floor on top for firms with internal models. The table sets out the changes that move ICAAP figures most often, with what the document then has to show.
| Area | What changes on 1 January 2027 | What the ICAAP has to reflect |
|---|---|---|
| Residential mortgages | Loan-splitting: a 20% risk weight on the part of the loan up to 55% of the property value and the borrower’s risk weight on the rest; whole-loan weights by loan-to-value where repayment depends on the property’s income | RWAs re-run by loan-to-value band, with every existing real estate exposure assessed for material dependence on property cash flows by 1 January 2027 (PS1/26 paragraph 2.6) |
| Corporates | Unrated corporates at 100% by default; with PRA permission, 65% for investment grade and 135% otherwise; unrated SME corporates at 85% | Rating and SME flags in the data, and a decision on the investment grade permission |
| Off-balance sheet | Conversion factors of 40% for other commitments (UK residential mortgage commitments excepted) and 20% for transaction-related contingent items | Commitment data held at product level |
| Operational risk | One standardised approach built on the Business Indicator, with marginal coefficients of 12%, 15% and 18% and the internal loss multiplier set to one | A new Pillar 1 figure, and loss data collected to the new rules |
| CVA and market risk | Three new CVA approaches; market risk on the advanced or simplified standardised approach, with internal models from 1 January 2028 | Trading book boundary decisions and the approach chosen for each book |
| Output floor (internal model firms) | Modelled RWAs floored at 60% of the standardised figure in 2027, 65% in 2028, 70% in 2029 and 72.5% from 1 January 2030 | A floored and an unfloored figure in every year of the projection |
Our article on what Basel 3.1 changes for UK banks covers each area in more depth, and the output floor explained sets out how the floor is calculated and where it applies in a group.
What changes in Pillar 2A?
More than most boards expect. Part of the change happens to the firm: the PRA will rebase Pillar 2A to remove double counting created by Basel 3.1, and during the output floor transition it will rebase variable Pillar 2A so that floor-driven increases in RWAs do not raise it where the risk is unchanged (PS9/24 paragraphs 6.2 and 6.11). That work runs through an off-cycle review that does not need a full ICAAP (paragraph 6.6). The rest changes in the ICAAP itself.
- The refined methodology to Pillar 2A retires for all firms on 1 January 2027 (PS2/26 paragraph 1.11).
- The benchmarking methodology, including the IRB benchmarks, is removed (PS15/26 paragraph 2.8), and the PRA will not publish replacement benchmarks for firms to cite (paragraph 2.10). An ICAAP that justified its credit risk add-on by reference to the benchmarks needs a new argument.
- Two systematic methodologies come in: one for exposures to central governments, central banks, regional governments and local authorities, and one for retail unconditionally cancellable commitments (paragraph 2.1).
- For idiosyncratic credit risk, firms choose their own approach, and a detailed assessment is expected only for a smaller subset of exposures (paragraph 2.39).
- The SME and infrastructure support factors leave Pillar 1 and return as firm-specific Pillar 2A lending adjustments, designed so that overall requirements do not rise (PS9/24 paragraph 1.16; PS7/25).
- Operational risk scenario analysis gets clearer expectations, and the scenarios should cover at least all the Basel event types (PS15/26 paragraph 3.14).
- For pension risk the PRA-prescribed stress scenarios go, and a scheme that is fully bought-in or at least 130% funded on the firm’s accounting basis needs no full FSA081 submission (paragraphs 4.1 and 4.6).
- Contingent FX risk on items held at historical exchange rates leaves the Pillar 1 market risk charge, and the ICAAP should consider it under Pillar 2 (PS1/26 paragraphs 4.7 to 4.11).
The PRA did not expect the first phase to change firms’ total capital requirement substantially in aggregate, but it said the effect on individual firms will vary with their portfolios (PS15/26 paragraph 6.9). A second phase is due for consultation in 2027.
What should the capital plan show?
Every year of the plan on the new basis. SS31/15 paragraph 3.9 expects a firm to project its capital resources and requirements over a three to five year horizon, taking account of its business plan and adverse scenarios. A five-year plan drawn up in 2027 runs through every step of the output floor to 72.5% in 2030, so a firm with internal models should show the floored figure for each year and say in which year, if any, the floor binds.
For a standardised firm the floor never binds, because its modelled and standardised figures are the same. Its plan still moves: new risk weights, new conversion factors and a new operational risk charge change the starting point, and management actions that looked credible on the old numbers need testing on the new ones. The stress results feed the PRA buffer, which SS31/15 expects firms to meet with CET1 (paragraph 5.23), so the scenarios have to run on the Basel 3.1 balance sheet as well.
What about small domestic deposit takers?
They follow a separate track. An SDDT applies the SDDT capital regime from 1 January 2027: Pillar 1 built on the Basel 3.1 standardised approaches for credit and operational risk, a Single Capital Buffer of at least 3.5% of RWAs in place of the conservation, countercyclical and PRA buffers, simplified Pillar 2A methods in SoP5/25, and SS4/25 in place of SS31/15 (PS4/26; PS20/25 paragraph 1.14). Since 20 January 2026 an SDDT that is not a new and growing bank updates its ICAAP every two years. Our page on the SDDT regime covers eligibility, and our article on whether to join sets out the trade-offs.
What should the board ask before approving the 2027 ICAAP?
SS31/15 paragraph 2.2 expects the management body to be responsible for the ICAAP and to use it in its decisions, not just approve it. Five questions test whether it can.
- Which figures in this document are on the Basel 3.1 basis, and do they reconcile to the numbers we will report to the PRA from 1 January 2027?
- Where does our Pillar 2A credit risk assessment now rest, given the benchmarks have gone?
- In which year of the plan does the output floor bind, if it binds at all?
- Which management actions did we test on the new numbers, and which of them still work in the stress we describe?
- What has the PRA’s off-cycle review told us, and is it reflected here?
Where does the 2027 update usually go wrong?
In the joins between teams. The ICAAP’s Pillar 1 figures come from one model run and the first Basel 3.1 regulatory returns from another, so the supervisor sees two numbers for the same thing. The Pillar 2A section still cites the IRB benchmarks after they have been withdrawn. The pension section still runs the old prescribed stress. And the back book has not been assessed for material dependence, so the mortgage RWAs rest on an assumption the rules do not allow.
None of these needs a new methodology to fix. They need one owner for the numbers and time before the board pack goes out. Our ICAAP service covers a full rewrite or an independent review of a draft, the RisKIT capital models produce Basel 3.1 projections in open Excel, and our Basel 3.1 readiness guide sets out the order of work. For the basics, start with what is an ICAAP, and if the missing piece is that owner, our head of prudential risk search finds one. Terms are defined in our glossary.
Questions readers ask
Do we need to submit a full ICAAP for the PRA’s off-cycle review?
No. PS9/24 paragraph 6.6 says a full ICAAP is not needed for the off-cycle review, in which the PRA adjusts firm-specific Pillar 2 capital to remove double counting created by Basel 3.1.
Does the output floor affect a bank on the standardised approach?
No. The floor compares modelled RWAs with a fully standardised calculation, and for a firm without internal models the two are the same, so the floor cannot bind. The other Basel 3.1 changes still apply.
We are an SDDT. Does PS15/26 apply to us?
In part. Its credit risk chapter does not apply to firms in the SDDT regime, apart from a consequential update on credit risk mitigation (PS15/26 paragraph 2.3), but the pension risk chapter does (paragraph 4.2), and the PRA updated SoP5/25 and SS4/25 alongside it.
When does the internal model approach for market risk apply?
On 1 January 2028. During 2027 firms keep their existing internal model permissions for positions in scope, and other positions move to the new standardised approaches (PS1/26 paragraphs 3.4 and 3.10). Our article on FRTB in the UK sets out the interim year.
Sources: PRA PS15/26, Pillar 2A review Phase 1 (28 May 2026), paragraphs 2.1, 2.3, 2.8, 2.10, 2.39, 3.14, 4.1, 4.2, 4.6, 6.5 and 6.9; PRA PS1/26, Implementation of Basel 3.1: final rules (20 January 2026), paragraphs 2.6, 3.4, 4.7 to 4.11; PS1/26 Appendix 1, PRA Rulebook CRR instrument; PRA PS9/24 (12 September 2024), paragraphs 1.16, 6.2, 6.6 and 6.11; PRA PS2/26 (20 January 2026); PRA PS7/25 (22 May 2025); PRA PS4/26 (20 January 2026); PRA PS20/25 (28 October 2025); PRA SS31/15 (version effective 1 July 2026; next version effective 1 January 2027), paragraphs 2.2, 3.9 and 5.23. Accessed 29 September and 1 October 2026.
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