Insights · White paper
Basel 3.1 is the PRA’s name for the final Basel III reforms to how banks measure risk-weighted assets (RWAs), and it applies to UK banks, building societies and PRA-designated investment firms from 1 January 2027.
Small domestic deposit takers (SDDTs) that have opted in apply the simpler SDDT capital regime from the same date, and the internal model approach for market risk follows on 1 January 2028.
This guide is for CROs, CFOs and board members with one quarter to go. It sets out what applies on day one, what the board should have seen before then, what the PRA has said it will do with Pillar 2, and where readiness work goes wrong in the drafts we review.
By Mark Dougherty, CPA (CAN)Updated
Scope
Basel 3.1 applies to every PRA-authorised bank, building society and PRA-designated investment firm, and to PRA-approved or PRA-designated financial holding companies, unless the firm meets the SDDT criteria and has accepted the PRA’s modification to join the SDDT regime.
HM Treasury’s SI 2026/45, made on 13 January 2026, revokes the relevant parts of the UK Capital Requirements Regulation (CRR) from 1 January 2027, and the PRA’s rules in PS1/26 replace them. To join the SDDT regime a firm must meet all nine criteria; in a group, most of the tests apply both to the consolidated group and to each UK bank and building society in it.
The nine criteria cover size, UK lending, trading book, FX, commodities, IRB, services to other banks, payment systems and ownership; check each one in our SDDT eligibility checker.
Entry is by modification by consent, which the PRA chose so that eligible firms can stay outside the regime if they prefer. As of 13 October 2025, 56 firms had opted in, out of around 80 the PRA estimated to be eligible. There is no halfway house any more: the Interim Capital Regime, designed to keep eligible firms on current CRR requirements until the SDDT regime arrived, was revoked on 20 January 2026 and never took effect.
An SDDT is not spared the recalculation. Its Pillar 1 uses the Basel 3.1 standardised approaches to credit and operational risk, so the mortgage book is re-weighted either way. What the regime removes is much of the machinery around it: CVA risk capital, most derivative counterparty credit risk capital, the step-in risk rules and, because an SDDT cannot use IRB, any exposure to the output floor. Our article on whether your bank should join the SDDT regime sets out the trade-offs.
Sources: PRA, PS1/26 Implementation of Basel 3.1: final rules, 20 January 2026, paras 1.3 and 2.16; SI 2026/45, 13 January 2026; PRA Rulebook, SDDT Regime, General Application, rules 2.1, 2.2 and 3.1; PRA, PS20/25, 28 October 2025, paras 1.14 and 1.17; PRA, PS4/26, 20 January 2026, para 1.17.
Timetable
One date matters most: 1 January 2027, when Basel 3.1, its reporting requirements, the SDDT capital regime and the Pillar 2A changes all take effect together. The rest of the timetable runs to 1 January 2030, when the output floor reaches 72.5%.
| Date | What happens |
|---|---|
| 20 January 2026 | Final rules published: PS1/26 for Basel 3.1 and PS4/26 for the SDDT capital regime. The two-year ICAAP and ILAAP update cycle for SDDTs (other than new and growing banks) takes effect the same day, and the Interim Capital Regime is revoked. |
| 31 March 2026 | Deadline for the Basel 3.1 Pillar 2 data collection, on a reference date of 31 December 2025. |
| 28 May 2026 | PS15/26, Phase 1 of the PRA’s Pillar 2A review, published. |
| 18 September 2026 | Consultation on CP9/26, changes to the internal model approach for market risk, closes. Not yet final. |
| 1 January 2027 | Basel 3.1 and its reporting requirements take effect, with the output floor at 60%. The SDDT capital regime, the Pillar 2A changes in PS2/26 and PS15/26, and the material dependence assessment deadline for existing real estate exposures all land the same day. |
| 1 January 2028 | The FRTB internal model approach (IMA) for market risk takes effect. Output floor rises to 65%. |
| 1 January 2029 | Output floor rises to 70%. |
| End of 2028 | Latest date for the PRA’s review of the SDDT criteria. |
| 1 January 2030 | Output floor fully phased in at 72.5%. |
The dates that catch firms out are the ones already behind them. The two-year ICAAP and ILAAP cycle for SDDTs has applied since 20 January 2026, and the Pillar 2 data collection closed on 31 March 2026 against 31 December 2025 figures. Those submissions are what the PRA will use to recalibrate Pillar 2, so a firm whose later numbers differ from them should have the reasons written down. Every dated PRA change to 2030 is in our regulatory tracker.
Sources: PRA, PS1/26, 20 January 2026, paras 1.23 to 1.26; PRA, PS1/26 Appendix 1, Article 92(2A) and 92(5); PRA, news release, 17 January 2025; PRA, PS4/26, para 1.15; PRA, Basel 3.1 data collection exercise; PRA, CP9/26, 19 June 2026; PRA, PS15/23, 5 December 2023, para 2.27.
What changes
For a lender on the standardised approach most of the work is in credit risk. For an IRB bank, the narrower scope of IRB and the output floor matter more.
Residential mortgages are re-weighted by loan-to-value and by whether repayment relies on income from the property, unrated corporates and SMEs take new risk weights, and IRB banks lose IRB for some portfolios and face input floors on the rest. Operational risk moves to one standardised approach built on the Business Indicator, CVA and market risk get new approaches, and the output floor stops modelled RWAs falling below 60% of standardised RWAs in 2027, rising to 72.5% from 1 January 2030. Our article on what Basel 3.1 changes for UK banks sets out each area rule by rule.
In September 2024 the PRA estimated that Tier 1 capital requirements for major UK banks are likely to rise by less than 1% by 1 January 2030. That average tells a single firm very little. A building society with a high loan-to-value book and a specialist lender with buy-to-let and SME exposures can move in opposite directions, and only a recalculation on the firm’s own balance sheet settles it.
The output floor applies at specific levels: individually to a stand-alone UK institution, sub-consolidated to a ring-fenced body in a sub-consolidation group, and on a consolidated basis to a CRR consolidation entity that is not an international subsidiary. A group therefore needs standardised numbers for every portfolio its subsidiaries model, even where a subsidiary’s own ratios stay un-floored. We cover this in more detail in our note on the output floor.
Sources: PRA, PS1/26 Appendix 1, PRA Rulebook: CRR Firms: (CRR) Instrument 2026, Articles 92, 122, 124F and 124G, Operational Risk Part 5.8 and 5.9; PRA, PS9/24, 12 September 2024, paras 1.16, 1.30, 3.35 to 3.40 and 3.51; PRA, PS17/23, 12 December 2023, paras 4.2 and 5.2; PRA, PS1/26, paras 2.10, 3.4 and 4.7 to 4.11.
Pillar 2A and the ICAAP
Pillar 2A is recalibrated alongside Pillar 1, so the board should expect its Total Capital Requirement to change on two fronts at once.
The PRA has said it will not double count capital for the same risk in Pillar 1 and Pillar 2A. In an off-cycle review it will adjust Pillar 2 for any double counting and rebase variable Pillar 2A and the PRA buffer, and during the output floor transition it will rebase Pillar 2 so that floor-driven RWA increases do not raise Pillar 2A where the risk is unchanged. The SME and infrastructure support factors come back as firm-specific Pillar 2A adjustments, designed so that removing them from Pillar 1 does not raise overall requirements.
Three other changes take effect on 1 January 2027. PS2/26 retires the refined methodology to Pillar 2A for all firms. PS15/26 removes the benchmarking methodology, IRB benchmarks included, and adds systematic methodologies for central government, central bank, regional government and local authority exposures and for retail unconditionally cancellable commitments; the PRA did not change its Pillar 2A operational risk methodology. And contingent FX risk is to be covered under Pillar 2, which the PRA intends to consider in Phase 2 of its review.
For SDDTs the picture is different: from 1 January 2027 they follow SS4/25 rather than SS31/15 for the ICAAP, Pillar 2A uses the simplified methodologies in SoP5/25, and a Single Capital Buffer, set no lower than 3.5% of RWAs (SoP5/25, paragraph 12.11), replaces the capital conservation buffer, the countercyclical buffer and the PRA buffer.
A full ICAAP is not needed for the off-cycle review. The next regular one is another matter: it must be written on the rules that will apply, and the capital plan inside it should show the floor rising year by year rather than the 2027 figure alone. If your credit risk Pillar 2A leans on the refined methodology or IRB benchmarks, model the replacement now so the board meets the new figure in the capital plan and not for the first time in a letter. Our guide what is an ICAAP covers the basics for newer board members.
Sources: PRA, PS9/24, paras 6.2, 6.6 and 6.11; PRA, PS7/25, 22 May 2025; PRA, PS2/26, 20 January 2026, para 1.11; PRA, PS15/26, 28 May 2026, paras 1.12, 2.1 and 3.1; PRA, PS1/26, para 4.11; PRA, PS4/26, para 1.16; PRA, PS20/25, paras 1.14 and 4.43; PRA, SoP5/25, para 12.11; PRA, SS31/15.
Data and reporting
The new regulatory returns and the updated Pillar 3 disclosure templates apply from 1 January 2027, so the first Basel 3.1 reporting cycle is also the first test of the new data.
Firms with IMA permissions keep their existing IMA reporting templates until the FRTB internal model templates start on 1 January 2028. The Operational Risk Part, which carries the standardised approach and the loss data rules, takes effect on 1 January 2027.
Two data tasks sit outside the capital engine. Every existing real estate exposure must be assessed for material dependence on the property’s cash flows by 1 January 2027, and a property must be revalued where the firm estimates its value has fallen by more than 10% since the last valuation. And firms outside the SDDT regime have been subject to the Step-in Risk Part since 1 January 2026: its data items go to the PRA at the same time as the ICAAP, and the management body approves the step-in risk assessment and policy.
In our experience the material dependence assessment is where the data runs out. It is done loan by loan, and the answer often sits in origination files or underwriting notes rather than in the fields that feed the capital calculation. Firms that start it late tend to fall back on blanket assumptions, which cost capital and invite questions. Firms in scope of step-in risk should read our step-in risk page before the next ICAAP is due.
Sources: PRA, PS1/26, paras 1.26, 2.6 and 3.27 and Appendix 16; PRA Rulebook, Operational Risk Part, view dated 1 January 2027; PRA, PS5/25, 22 April 2025, paras 1.2 and 1.15; PRA Rulebook, Step-in Risk Part, rules 9.1 and 9.2; PRA Rulebook, Regulatory Reporting Part, rule 24.5.
Board checklist
Ten steps, in the order the work depends on them. A board that can tick all ten is ready; a board that cannot knows where to press.
| Step | Action | What the board should have seen |
|---|---|---|
| 1 | Confirm the regime | A written decision that the firm is on Basel 3.1 or the SDDT regime, with each criterion tested at every entity where it applies. |
| 2 | Recalculate RWAs on the final rules | Basel 3.1 RWAs on a recent quarter-end, by risk type and portfolio, with the method and the data sources named. |
| 3 | Reconcile to the current rules | A bridge from current to Basel 3.1 RWAs that explains every material movement, and which movements are data problems rather than rule changes. |
| 4 | Finish the real estate assessment | Confirmation that every existing real estate exposure has been assessed for material dependence on the property’s cash flows, and how much of the book rests on judgement. |
| 5 | Project the output floor (IRB firms) | The floor’s effect at each level where it applies, from 60% in 2027 to 72.5% in 2030. |
| 6 | Re-estimate Pillar 2A | The expected effect of the off-cycle rebasing, the SME and infrastructure lending adjustments, the retired refined methodology and the PS15/26 changes. |
| 7 | Rebuild the capital plan | Ratios and headroom over the planning horizon on the rules that will apply, with management actions sized against them. |
| 8 | Update the ICAAP and policies | An ICAAP timetable built on the new numbers, and policies that no longer cite withdrawn supervisory statements such as SS11/13 and SS14/13. |
| 9 | Test reporting and disclosure | Evidence that the new returns and the updated Pillar 3 templates have been run end to end, with named owners. |
| 10 | Settle the market risk route | For firms with a trading book: the interim-year choice between keeping IMA permissions and moving to the ASA, and the plan for 1 January 2028. |
Steps 2 and 3 carry the rest. The ICAAP, the capital plan and the first returns all rest on the recalculated RWAs, so a reconciliation that is still moving in December moves everything built on it. Where time is short, we would put the effort there, and into step 4 for any lender with real estate exposures, before polishing documents.
Sources: PRA, PS1/26, paras 1.23 to 1.26, 2.6, 2.9, 2.14 and 3.4 to 3.11; PRA, PS1/26 Appendix 1, Article 92; PRA, PS9/24, chapter 6; PRA Rulebook, SDDT Regime, General Application, rule 2.2.
Common failure points
Most readiness problems we see are about sequence: the numbers arrive after the documents that depend on them. The technical rules are rarely the hard part by the final quarter.
The fix for most of these is the same: agree the reconciled RWAs first, date the board’s sight of them well ahead of the ICAAP approval meeting, and make each later document point back to that one set of numbers.
Sources: our observations from drafts we review; rule references from PRA, PS1/26, paras 2.6, 2.9 and 2.14; PRA, PS1/26 Appendix 1, Article 92; PRA, PS2/26; PRA, PS15/26.
Supervisory expectations
The PRA has told firms what it will do with the numbers: recalibrate Pillar 2 to remove double counting, rebase variable Pillar 2A and the PRA buffer, and stop floor-driven RWA increases lifting Pillar 2A where the risk has not changed.
It collected Pillar 2 data for that purpose, with a 31 March 2026 deadline; SDDT-eligible firms that had consented to the SDDT modification were exempt. PS1/26 made no substantive change to the near-final policy outside market risk, so impact work done on the near-final text still stands. Firms with a residual risk add-on permission should build the change into their Pillar 2A calculation, and firms with a double counting issue from the one-year delay to FRTB internal models are asked to raise it with their supervisors.
The PRA has not published a Basel 3.1 readiness checklist, and we do not suggest one exists. What it has set out is the chain from Pillar 1 to Pillar 2 to buffers, and a firm’s documents should follow the same chain.
The first test we apply to a Basel 3.1 ICAAP is whether its RWAs reconcile to the figures the firm gave the PRA in the data collection and to its first Basel 3.1 returns. Where they differ, the explanation belongs in the document before a supervisor asks for it.
Sources: PRA, Basel 3.1 data collection exercise, updated 29 January 2026; PRA, PS9/24, paras 6.2, 6.6 and 6.11; PRA, PS1/26, paras 1.7, 3.10 and 3.26.
How we help
We give boards and executives an independent read on their readiness, or we do the work and hand it over.
As advisers, our senior people (former CROs and heads of risk, former regulators and interim executives) challenge the impact assessment, the reconciliation and the capital plan before they reach the board or the PRA. As consultants, working with our model and quant specialists, we recalculate RWAs, run the parallel calculation and rewrite the ICAAP, then hand everything over with documented assumptions. Our Basel 3.1 service page has the detail. If you would rather run the work in-house, we supply day-rate Basel 3.1 specialists, and our Basel 3.1 course trains the people who run the numbers.
The RisKIT capital models include ICAAP models for the current rules and for Basel 3.1, with a version for the EU’s rules for groups that also report there: pre-built, open Excel on a perpetual licence, with every formula visible to your validators and set-up and validation supported. Running both on the same balance sheet is a quick way to size the capital change. For directors who want to test management’s numbers themselves, board risk training covers the questions to ask.
Our people cover every part of the recalculation: credit risk on the new standardised approach and IRB, market risk under FRTB, CVA, operational risk and the output floor.
Source for the rules referred to: PRA, PS1/26, 20 January 2026.
FAQ
No, but the order of work matters more now than it did a year ago. Start with the recalculated and reconciled RWAs and the material dependence assessment, because the capital plan, the ICAAP and the first returns all depend on them. Document polishing can follow in early 2027; the day-one numbers cannot wait.
Yes. The SDDT capital regime takes effect that day, and its Pillar 1 uses the Basel 3.1 standardised approaches to credit and operational risk, so an SDDT still re-weights its book. It also moves to SS4/25 for the ICAAP, the simplified Pillar 2A methodologies in SoP5/25 and a Single Capital Buffer of at least 3.5% of RWAs (SoP5/25, paragraph 12.11).
The PRA estimated in September 2024 that Tier 1 capital requirements for major UK banks are likely to rise by less than 1% by 1 January 2030. A single firm can move by much more or less, depending on its mortgage loan-to-value mix, unrated corporate lending, any portfolios leaving IRB and the output floor. Only a recalculation on your own balance sheet will tell you.
No. The ten-step board checklist in this guide is our own, and what the PRA will look for sets out what the regulator has published instead.
On 1 January 2028. During 2027, firms with IMA permissions can keep them, with other positions on the advanced standardised approach, or move the whole trading book to that approach. Existing IMA permissions then end automatically. The PRA’s CP9/26 proposals on the IMA closed for comment on 18 September 2026 and are not yet final.
Insights
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...
By Mark Dougherty, CPA (CAN) · 8 min read
Basel 3.1, the PRA's version of the final Basel III reforms, applies to UK banks and building societies from 1 January 2027. It reworks the standardised approaches and phases in an output floor that reaches 72.5% of standardised risk-weighted assets on 1 January 2030.
By Mark Dougherty, CPA (CAN) · 7 min read
The Basel 3.1 output floor stops a firm’s modelled risk-weighted assets falling below a set share of what the standardised approaches would produce. In the UK it starts at 60% on 1 January 2027 and rises...
By Mark Dougherty, CPA (CAN) · 7 min readNext step
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