PRA closes the Basel 3.1 book: market risk rules tilt toward international parity

The PRA has put the last brick in the Basel 3.1 wall. On 19 June 2026 it published a consultation on the internal model approach (IMA) to market risk, the rules governing how banks with significant trading operations calculate capital against potential trading losses (Bank of England). The headline is not the technical detail but the framing: Sam Woods has explicitly tied the timing and substance of the proposals to what other jurisdictions are doing, a meaningful shift in tone from a regulator that has historically led rather than waited.

The concessions are targeted but consequential. The monitoring period for the profit and loss attribution test, the gateway determining whether a desk can use internal models at all, has been extended from one year to three, giving the PRA time to calibrate before the test bites on capital (Bank of England). The treatment of non-modellable risk factors, long a source of capital inflation under the Fundamental Review of the Trading Book, is being narrowed to allow more modelling where appropriate. And the PRA is removing a perverse outcome where firms transitioning from the standardised approach to full IMA could see capital requirements rise during the journey. Each adjustment, on its own, is technical. Taken together, they reduce the implicit penalty for running a sophisticated trading book in London.

For senior leaders, the strategic question is whether this changes the calculus on where to book activity. Sam Woods, Deputy Governor for Prudential Regulation, said the proposals ensure 'that trading activities by banks in the UK are appropriately capitalised' while accounting for implementation elsewhere (Bank of England). The subtext: the PRA is alert to the risk that misaligned calibration drives business to New York or Frankfurt. CFOs and treasurers at international banks should be rerunning capital impact studies on the assumption that the UK number is now closer to, rather than above, the US equivalent. Heads of market risk should expect supervisors to scrutinise IMA applications more rigorously precisely because the gate has been widened.

The broader signal matters too. This is the second prudential move in a fortnight, alongside the Bank's stablecoin policy statement raising the cap on interest-bearing backing assets from 60% to 70% (Bank of England), where the UK is consciously calibrating to support viable business models rather than maximising prudential conservatism. Boards should read this as a durable adjustment in regulatory posture rather than a one-off concession. The competitiveness and growth objective, often dismissed as rhetorical, is now visibly shaping rule design.

There are risks in this direction of travel. A more permissive IMA regime works only if supervision is tight enough to catch model drift before it becomes a loss event. Firms that read the consultation as a green light to expand trading risk without commensurate investment in model governance will find themselves on the wrong side of the next supervisory cycle. The PRA has bought itself optionality through the extended monitoring window; it will use that data.

The implication for boards: Basel 3.1 is now a known quantity in the UK, and the competitive question shifts from compliance cost to capital allocation. Those still treating it as a regulatory project rather than a strategic input are behind.