The Prudential Regulation Authority has opened a consultation on a package of targeted adjustments to the Basel 3.1 internal model approach (IMA) for market risk, proposing changes intended to make the framework more proportionate and operationally workable while maintaining its prudential standards. Published on 19 June 2026 as consultation paper CP9/26, the proposals follow the PRA's finalisation of the Basel 3.1 rules in PS1/26 and respond to evidence that surprisingly few firms had been planning to adopt internal models under the framework as drafted.
The IMA is the most risk-sensitive of the approaches banks can use to calculate market-risk capital, and its implementation has already been delayed to 1 January 2028 to allow for international coordination, given that it is used predominantly by major trading firms and cross-border groups. The PRA said that since publishing its final rules it had reviewed data from the Basel Committee on Banking Supervision's Quantitative Impact Study and firms' own IMA applications, and identified a small number of areas where the current rules may not fully achieve their intended objectives, may be unduly burdensome, or may need more time to assess. The regulator stated it would expect a reasonable number of firms to make use of the more risk-sensitive approach, and that the low expected take-up indicated adjustments were warranted to support an international level playing field and the competitiveness of UK-based banks operating internationally.
The proposals are specific rather than wholesale. The PRA would extend the monitoring period for the profit and loss attribution test (PLAT) — a model-accuracy check — from one year to three, during which a failure would not automatically remove a trading desk from internal modelling, allowing more evidence to be gathered on the test's calibration. It would adjust the risk factor eligibility test by reducing the number of verifiable prices required to pass from 24 to 16 for less liquid risk factors, where capital requirements already reflect illiquidity, and introduce a proportionate requirement for new issuances. A new intermediate category of non-modellable risk factors would be created, letting risk factors that meet qualitative data standards but lack sufficient verifiable prices remain in the expected-shortfall model subject to a capital add-on, rather than being removed entirely.
Further proposals would recognise diversification between the advanced standardised approach and the IMA to remove an artificial increase in capital that can arise when a firm begins adopting internal models for part of its portfolio, replacing existing partial caps with a permission-based cap. The PRA also proposes operational simplifications to the treatment of collective investment undertakings, introducing a 90% look-through threshold for IMA inclusion, alongside a set of minor clarifications and consequential changes to reporting and disclosure.
The changes impact finance professionals because they bear directly on how much capital banks must hold against trading activities and on whether firms judge internal models worth adopting at all. The PRA's own cost-benefit analysis estimates annual benefits to firms of between £1.8 million and £60 million, arising mainly from increased IMA adoption and the revised treatment of non-modellable risk factors. Lower operational friction and a more risk-sensitive capital outcome could influence banks' willingness to offer derivative and hedging products to end-users, affecting the cost and availability of risk-management services used across the real economy.
A more proportionate market-risk framework that retains robust standards is the balance the PRA is attempting to strike, and the consultation frames the adjustments as preserving the long-run calibration of Basel 3.1 rather than weakening it. The proposals also reflect a wider effort to keep UK rules aligned with other major trading jurisdictions, several of which are weighing comparable adjustments, as the implementation timelines in the United States and the European Union continue to shape the competitive backdrop. With the consultation closing on 18 September 2026 and the IMA implementation date held at 1 January 2028, banks with trading operations now have a defined window to assess how the proposed changes affect their modelling plans and capital, and to respond before the rules are finalised.
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