Core Path · L4.2.11

Credit risk capital: what changes from 2027

12 minBasel 3.1PRACRR3Output floorTransitional arrangements

Know these first

Math Atoms

By the end you will be able to

  1. 1List the UK's credit risk changes from 1 January 2027, each with its source, and say which are final and which were only proposed.
  2. 2Work each change on a bank's book, one at a time, and say whether the output floor lets it count.
  3. 3Compare the UK with the EU's CRR3 and its Article 465 transitional arrangements.
  4. 4Explain why the year matters: the same change can save RWA in 2027 and nothing in 2030.

Why it matters

On 31 December 2026 RiskAtoms Bank plc calculates credit RWA under the old UK CRR. On 1 January 2027 it switches to the PRA's Basel 3.1 rules. Some changes cut its RWA: dropping the 1.06 factor alone takes £747.7m off its IRB RWA. Others add: a 10% conversion factor on credit card limits, the end of the SME factor, and from 2029 an output floor that swallows most of the savings. Which wins depends on the year you look at.

Core explanation

Old rule, new rule, and how final

L4.1.08: Basel 3.1 from 2027: UK, EU and US set out the Basel 3.1 timetable across the UK, the EU and the US. This lesson takes the credit risk rules change by change, with the source and status of each, and works every one on the book. Modules 4.1 and 4.2 already apply the new rules pro forma, so the old rule is the one put back.

Illustrative dataRiskAtoms Bank plc's capital book

The same made-up UK bank as Level 3: £67bn of assets and £4bn of equity at 31 December 2025, in £ millions. Module 4.1 adds its regulatory layer: own funds, deductions, risk-weighted assets by risk type, buffers, the leverage exposure and MREL, computed from the Level 3 credit, trading, derivatives and operational risk books. Every figure is illustrative, not any bank's data.

Pro forma. The book applies Basel 3.1, the 2017 finalisation of Basel III, to the 31 December 2025 balance sheet. On that date the bank still reported under the old UK CRR. The UK applies Basel 3.1 from 1 January 2027, and the internal model approach for market risk from 1 January 2028 (PRA PS1/26, paras 1.23 and 1.24). So the book shows the bank as it would look under the new rules.

One rule at a time. Each comparison puts one old UK CRR rule back on the Basel 3.1 book and keeps everything else. The comparisons do not add up to the bank's actual old-rule RWA, which the book cannot rebuild: the old models and collateral rules are not in it.

How the UK rules were made

TimelineFrom consultation to the first day

1 / 8

Nov 2022

CP16/22

The PRA consults on Basel 3.1, including removing the 1.06 factor (paras 4.118–4.119).

The changes, one by one

As at 3 November 2026 as at 3 Nov 2026. Change is 2027 rules minus old rule, in £m of the book's RWA; U is U-TREA, S is S-TREA.

ChangeOld UK CRR (to 31 Dec 2026)From 1 Jan 2027StatusBook
SA mortgages35% up to 80% LTV (Art 125)Loan-splitting: 20% up to 55% LTV, 75% above (Art 124F)Final (PS1/26; SS10/13, July 2026)S −1,073.6
Cancellable lines0% CCF10% CCFFinal (PS9/24 2.43–2.46, PS1/26)U and S +136.7
IRB scopeA-IRB open to all corporatesNo A-IRB above £440m revenue or for financial sector entitiesFinal (IRB Part, Art 147(4C))none: corporates on F-IRB
F-IRB senior unsecured LGD (corporates)45%40% (Basel CRE32.6)Basel value; UK text not quoted hereU −746.3
Corporate PD floor0.03%0.05% (CRE32.4)Basel value0: lowest PD 0.07%
1.06 factor on IRB× 1.06 (Art 153, 154)RemovedProposed (CP16/22 4.119); see the UK noteU −747.7
SME support factor× 0.7619 / 0.85 (Art 501)Removed; Pillar 2A SME lending adjustmentFinal (PS1/26 1.16; PS7/25)U +158.1, S +414.1
Infrastructure factor× 0.75 (Art 501a)Removed; Pillar 2A adjustmentFinal (PS1/26 1.16; PS7/25)none in the book
Output floorNone60%, 65%, 70%, then 72.5% from 2030, plus OF-ADJFinal (Art 92(2A), (5))+2,184.2 at 72.5%

Standardised side

The 35% for mortgages up to 80% LTV goes. The UK chose loan-splitting for loans to people: the PRA's own example of an £80,000 loan on a £100,000 home gives 37.19% (SS10/13, para 5.13). The Basel Framework allows that or a whole-loan table by LTV (CRE20.82–20.83), and this module's book uses the table. So the same mortgages, which carried £10,866.6m of SA RWA under the old rule, carry £8,949.6m under the book's Basel table and £9,793.0m under the UK's loan-splitting. The mortgages are on IRB, so this moves only S-TREA, and only matters once the floor binds. Unused card limits and overdrafts, which the bank can cancel at any time, now count at a 10% conversion factor instead of 0% (unconditionally cancellable): £2,400m of limits add £136.7m of RWA. UK mortgage offers get a 50% factor (L4.2.03: Off-balance sheet items and other exposures).

IRB side

Three things lower IRB RWA. The 1.06 scaling factor goes, worth £747.7m on the book. The F-IRB LGD for senior unsecured corporate loans falls from 45% to 40% (CRE32.6), worth £746.3m. And the bank's corporates already sit above the higher PD floor (lowest PD 0.07%). Against them: A-IRB is closed to large corporates and financial firms (L4.2.04: The IRB approach), and input floors limit what A-IRB models can give. If the bank moved its eight eligible corporates to A-IRB with its own LGDs before downturn adjustment, the floors would add £36.8m, all on one borrower. Mortgage LGDs have a 5% floor per exposure, Basel's input floor, which the PRA already introduced in PS11/20, and the old UK CRR adds a 10% floor on the portfolio average (Article 164(4)): the book's average LGD is 10.8%, so neither binds.

The SME factor and its Pillar 2A replacement

Under the old rules RWA on loans to small and medium-sized firms were cut by the SME supporting factor. The book's one SME, Pellcourt, owes €138m per borrower, so its factor is 0.8484 and its F-IRB RWA rise by £158.1m when it goes. The PRA does not want the change to raise overall requirements on these loans, so it gives back a Pillar 2A lending adjustment: the RWA the factor used to save times a firm-specific capital adjustment factor (PS7/25, paras 2.6–2.8). With an assumed factor of 12.5%, Pellcourt's £158.1m gives back £19.8m of Pillar 2A capital. Pillar 1 ratios fall; total requirements do not rise. L4.9.01: Pillar 2 and the SREP covers Pillar 2A.

Final or proposed?

Sort itHow settled is it on 3 November 2026?

Sort each UK statement by its status.

  • The output floor rises 60%, 65%, 70%, then 72.5% from 2030

  • Cancellable credit lines get a 10% conversion factor

  • The 1.06 factor is removed from the IRB formula

  • Unrated corporates with PD of 0.5% or less get 65% in the floor until 2032

  • SME support factors are replaced by a Pillar 2A lending adjustment

  • Low-LTV mortgages get 10% on the slice up to 55% in the floor

The EU: CRR3 and Article 465

The EU has applied CRR3 since 1 January 2025. It keeps the SME and infrastructure support factors (Articles 501 and 501a), so Pellcourt keeps its 0.8484. And it softens the floor with transitional arrangements, all in Article 465 unless noted:

ArticleWhat it allowsUntil
465(1)Floor factor 50%, 55%, 60%, 65%, 70% in 2025 to 202931 Dec 2029
465(3)65% for unrated corporates with PD ≤ 0.5%, in S-TREA31 Dec 2032
465(4)SA-CCR alpha of 1 in S-TREA31 Dec 2029
465(5)With Member State permission: 10% on the mortgage up to 55% LTV; 45% from 55% to 80%2032 and 2029
465(9)The 45% slice steps up: 52.5%, 60%, 67.5% in 2030 to 203231 Dec 2032
465(13)SEC-SA p of 0.25 (STS) or 0.5 in S-TREA for SEC-IRBA positions31 Dec 2032
495dCancellable lines at 0% of the 10% CCF, then 25%, 50%, 75% in 2030 to 203231 Dec 2032

On the book, with every relief taken, the EU floor never binds before 2033: unrated Thornvale (PD 0.28%) moves to 65%, the mortgages' S-TREA falls by £3,330.5m, and in 2032 the floor is still £20,715.4m against U-TREA of £21,365.8m. That U-TREA is £192.3m below the book's £21,558.1m because the EU keeps the SME factor on Pellcourt (−158.1) and in 2032 cancellable lines still carry only 75% of their 10% factor (−34.2). In 2033, with the transitionals gone, it binds at £23,119.0m.

The formal version

The old rules in symbols, and the test of whether a change reaches total RWA (old UK CRR Articles 125, 153, 501; PRA Rulebook Articles 92(2A) and 124F). Percentages throughout (M-A01: Percentages):

RWIRBold=1.06×12.5×KfSME=min⁡(E∗,2.5)×0.7619+max⁡(E∗−2.5, 0)×0.85E∗(E∗ in €m)RWmortgageold=min⁡(LTV,80%)×35%+max⁡(LTV−80%, 0)×75%LTVRWmortgageUK=min⁡(LTV,55%)×20%+max⁡(LTV−55%, 0)×75%LTVΔRWA=max⁡(U, xS+OF-ADJ)−max⁡(U+ΔU, x(S+ΔS)+OF-ADJ)\begin{aligned} \text{RW}^{\text{old}}_{\text{IRB}} &= 1.06 \times 12.5 \times K \\ f_{\text{SME}} &= \frac{\min(E^*, 2.5) \times 0.7619 + \max(E^* - 2.5,\ 0) \times 0.85}{E^*} \quad (E^* \text{ in \text{€}m}) \\ \text{RW}^{\text{old}}_{\text{mortgage}} &= \frac{\min(\text{LTV}, 80\%) \times 35\% + \max(\text{LTV} - 80\%,\ 0) \times 75\%}{\text{LTV}} \\ \text{RW}^{\text{UK}}_{\text{mortgage}} &= \frac{\min(\text{LTV}, 55\%) \times 20\% + \max(\text{LTV} - 55\%,\ 0) \times 75\%}{\text{LTV}} \\[4pt] \Delta\text{RWA} &= \max\big(U,\ x S + \text{OF-ADJ}\big) - \max\big(U + \Delta U,\ x (S + \Delta S) + \text{OF-ADJ}\big) \end{aligned}

While the floor binds before and after, a change to U-TREA alone gives ΔRWA = 0, and a change to S-TREA gives x × ΔS. While it binds in neither, only ΔU counts. The part of an old mortgage above 80% LTV is weighted at 75% here, an assumption of the book.

Try it

Put the 1.06 factor back and move the floor from UK 2027 to UK 2030: where does the saving go? Then try the old 35% mortgage weight in each year.

The mortgage item measures the old 35% against the book's Basel whole-loan table, £8,949.6m, so putting it back moves S-TREA by 1,917.0. The changes table above measures it against the UK's loan-splitting, £9,793.0m, which is £843.4m higher: hence S −1,073.6 there, not −1,917.0.

Try itPut an old rule back

Old UK CRR rules to put back

Output floor

2027 rules minus old−£747.7m
Floor binds (2027 / old)no / no
CET1 ratio, 2027 rules14.01%
CET1 ratio, old rule back13.54%

The 2027 rules lower RWA by £747.7m against the old rule.

Pro forma on the 31 December 2025 book. UK floors add OF-ADJ of £934.6m and use the book's Basel S-TREA. Several rules together are added up from their one-at-a-time changes, which interact slightly (for example 1.06 also scales the 45% LGD effect). Illustrative data, £ millions.

Worked example

Each change on RiskAtoms Bank plc, one at a time

£ millions; Basel 3.1 book, with one old rule back each time.

Change by change

Step 1 of 7
  1. 1

    1.06 removed

    old=1.06×(8,934.7+3,526.3)=13,208.7change=−747.7 on U-TREA\begin{aligned} \text{old} &= 1.06 \times (8{,}934.7 + 3{,}526.3) = 13{,}208.7 \\ \text{change} &= -747.7 \text{ on U-TREA} \end{aligned}

    Under the UK's 2027 floor it cuts RWA by £747.7m; by 2030, with the floor binding either way, by £0.0m.

Regulatory lens

Status as at 3 November 2026 as at 3 Nov 2026. Check each source for later changes.

In the UK

The 1.06 factor, precisely. Basel: no 1.06 (CRE31; final since 2017). Old UK CRR: Articles 153(1) and 154(1) multiply IRB risk weights by 1.06, until 31 December 2026. UK from 2027: the PRA proposed removing it in CP16/22 (November 2022, paras 4.118–4.119) because it was “no longer necessary given the enhancements to the IRB framework” and the output floor. PS1/26 (January 2026) made the near-final policy final with no substantive change (para 1.7). The policy statements and rule instruments this lesson relied on do not show the final formula itself, so read Article 153 of the PRA Rulebook's Credit Risk: Internal Ratings Based Approach (CRR) Part before quoting the removal as a rule. The book follows Basel either way.

Floor with the UK's own S-TREA. The UK floor on the book, £23,742.3m, adds OF-ADJ to the Basel S-TREA (L4.2.09: The output floor). With the UK's loan-splitting in S-TREA as well, S-TREA rises by £843.4m and the floor to £24,353.8m (CET1 ratio 12.40%).

In the EU

CRR3, Regulation (EU) 2024/1623, has applied since 1 January 2025, with the floor at 72.5% from 2030 and the Article 465 transitionals to 2032. The EBA reports on the mortgage relief by 31 December 2028 and, with ESMA, on the unrated corporate relief by 10 July 2029; any extension of the paragraphs 3, 5 and 9 reliefs is limited to four years (Article 465(11), (3) and (12)).

In the US

No change on 1 January 2027. The agencies' capital proposals of 19 March 2026 were not final as at the date of this lesson (L4.1.08: Basel 3.1 from 2027: UK, EU and US).

Spark Atoms

Spark AtomSavings with an expiry date
Dropping 1.06 and the lower F-IRB LGD save the book about £1,494m of U-TREA together. In 2027 and 2028 every pound counts. From 2029 the UK floor binds, and the same changes save nothing: the floor, built on standardised weights, sets RWA.
Spark AtomThe EU's floor waits until 2033
With all of Article 465's reliefs, the book's EU floor stays below U-TREA every year to 2032. It binds in 2033, when the 10% mortgage slice and the 65% for unrated corporates end and S-TREA jumps by £3,315m.

Key takeaways

  • The UK's Basel 3.1 credit rules start on 1 January 2027 (PS1/26). Final: loan-splitting for mortgages, the 10% CCF on cancellable lines, limits on A-IRB, the end of the SME and infrastructure factors with a Pillar 2A offset, and the floor from 60% to 72.5% in 2030.
  • The 1.06 removal was proposed in CP16/22; the final formula sits in the PRA's IRB Part, Article 153. Basel has no 1.06.
  • On the book, U-TREA savings (1.06: £748m; LGD: £746m) count only while the floor does not bind, in 2027 and 2028.
  • S-TREA changes count at x once the floor binds: the book's Basel mortgage table saves £1,390m at 72.5%.
  • The EU keeps the SME factor and softens the floor with Article 465 to 2032; on the book its floor first binds in 2033.

Reaction

Check what stuck

Question 1 · objective 2

Under the old UK CRR a bank's IRB RWA were £10,000m, including the 1.06 scaling factor. By how much, in £m, does removing the factor lower them, other things equal?

£m

Question 2 · objective 2

Under the old Article 501, what supporting factor applied to an SME that owed the banking group €1m in total?

Question 3 · objective 1

From 2027 a UK bank lends £80,000 to a person on a £100,000 home, a regulatory residential exposure. What is the standardised risk weight, in %?

%

Question 4 · objective 1

A UK bank has £200m of unused, unconditionally cancellable credit card limits to people, weighted at 75%. What RWA do they add from 2027, in £m?

£m

Question 5 · objective 3

An EU bank's output floor would bind in 2027 without transitional rules. Which Article 465 relief can lower its S-TREA?

Glossary

Old UK CRR
The old UK CRR: the EU's Capital Requirements Regulation as it stood when the UK left the EU, kept in UK law and amended since. Its credit risk articles apply until 31 December 2026.
Near-final
Near-final: the PRA's wording for policy it has decided but not yet made into rules. PS17/23, PS9/24 and PS7/25 were near-final; PS1/26 made the final rules.
Final rules
Final: rules the PRA has made, in a Rulebook instrument with a start date.
1.06 scaling factor
1.06 scaling factor: a 6% uplift on IRB RWA added in 2004 to keep total capital at the old level. Basel III removed it in 2017.
Support factors
Support factors: EU and old UK multipliers that cut capital on SME loans (0.7619 and 0.85, Art 501) and qualifying infrastructure (0.75, Art 501a).
Pillar 2A lending adjustment
Pillar 2A lending adjustment: the UK's replacement for the support factors from 2027, a cut in each firm's Pillar 2A requirement equal to the RWA the factors used to save times a capital adjustment factor (PS7/25).
Loan-splitting
Loan-splitting: a mortgage risk weight in two parts, 20% on the loan up to 55% of the property value and the borrower's weight (75% for a person) on the rest.
Unconditionally cancellable commitment
Unconditionally cancellable commitment: a credit line the bank can cancel at any time without notice, such as an unused credit card limit.
Transitional arrangement
Transitional arrangement: a temporary rule while banks adjust. The EU's are in CRR Article 465 and mostly end in 2029 or 2032.

Deep Dives & Origins

Deep Dives

  • Prudential Regulation Authority, PS1/26 Implementation of Basel 3.1: Final rules, January 2026, chapters 1 and 2: what changed since the near-final rules. Intermediate.
  • Regulation (EU) No 575/2013, Article 465, as amended by Regulation (EU) 2024/1623: the EU's transitional floor, paragraph by paragraph. Advanced.

Origins

  • Prudential Regulation Authority, CP16/22 Implementation of the Basel 3.1 standards, chapter 4 (credit risk: IRB), November 2022, paras 4.118–4.119 and 4.161.
  • Prudential Regulation Authority, PS9/24, September 2024, paras 1.16, 2.43–2.46 and 2.120–2.126.
  • Prudential Regulation Authority, PS7/25 Update to PS9/24 on the SME and infrastructure lending adjustments, 22 May 2025, paras 1.6–1.7 and 2.1–2.9.
  • Prudential Regulation Authority, PS1/26, January 2026, paras 1.5–1.8, 1.16 and 1.23–1.26; PRA2026/24, Credit Risk (Amendment) Instrument 2026, 21 July 2026.
  • Prudential Regulation Authority, SS10/13 Standardised approach, July 2026, para 5.13.
  • Prudential Regulation Authority, PRA Rulebook: Required Level of Own Funds (CRR) Part, Article 92(2A) and (5), from 1 January 2027.
  • UK CRR (Regulation (EU) No 575/2013 as it applies in the UK), Articles 125, 153, 154, 160, 161, 164 and 501, legislation.gov.uk.
  • Regulation (EU) No 575/2013 (CRR), Articles 465, 495d, 501 and 501a, as amended by Regulation (EU) 2024/1623.
  • Basel Committee on Banking Supervision, CRE20 (20.82–20.83), CRE31, CRE32 (32.4, 32.6, 32.58), bis.org.

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