The Final Basel III Banking Standards will be Implemented in July 2025
Pictured: Sam Woods, CEO at the PRA
Background: Basel III Reforms
In response to the 2008 global financial crisis, the Basel III reforms to international banking standards were introduced throughout 2010-2017. The reforms sought to ensure banks have greater financial resilience to economic downturns with capital adequacy that correlates more accurately to the risk taken on by those banks. This is done by a more nuanced approach to risk, including risk mitigation and an enhanced focus on capital adequacy and permitted mitigation arrangements.
Providing further clarity, the FCA's Business Plan 2024/25 outlines that "As the increase in corporate insolvencies is expected to persist in 2024, we will continue to use data and horizon-scanning mechanisms to anticipate firms that are at risk of failure and make sure that we can respond appropriately in the event that they do to protect consumers and ensure market integrity".
What’s New Under the Basel III Amendments?
The PRA set out its proposals to implement the Basel III standards for credit risk mitigation for funded and unfunded protection. Changes include:
the introduction of an explicit requirement that the insurance/guarantee would only be eligible if it does not contain any clause that would allow the insurer/guarantor to change unilaterally the insurance/guarantee to the detriment of the lender
clarification that an insurer/guarantor can either pay the lump sum due from the obligor or assume the future obligations of the obligor in the event of a valid claim on the insurance/guarantee
for credit insurance (including MIG), clarification that these can be treated as eligible CRM where the eligibility criteria are met, being treated as either a guarantee or a credit derivative depending on how the credit insurance functions.
