BASEL 3.1 UPDATE

Basel 3.1 Update – February 2025

In 2017, the Bank for International Settlements Basel Committee (BCBS), which provides guidance on financial regulation internationally, recommended reforms in the banking sector. In response, jurisdictions including the EU and the UK committed to following the recommendations of the Basel committee.

The proposals for the UK, known as the Basel 3.1 standards, were made by the Prudential Regulation Authority (PRA), and set out in a consultation paper, CP16/22, in 2022. They included the introduction of Prudent Value, a framework for conservative criteria to be applied to mortgage valuations, aimed at reflecting the risk of the current market price being significantly above the value of the property over the life of the loan. However, it would have required significant change to valuation practice and, with the requirement to value properties at an individual level, there was concern over how this would be implemented and the risk of individual approaches leading to inconsistent outcomes. Connells S&V contributed to the RICS response on the consultation.

Numerous other responses were submitted by stakeholders to the Basel implementation proposals described in CP16/22, and this was partly responsible for the PRA delaying the implementation of Basel 3.1, allowing more time to assess the responses and confirm next steps.

In September last year, the PRA published a ‘near-final’ policy statement, with a new implementation date of 1 January 2026. Amendments to the draft rules included the removal of the requirement for Prudent Value, with the PRA having agreed that its application would be complex for firms to operate and may lead to inconsistent approaches.

CP16/22 proposed the value for residential (and commercial) property should be the value at origination and this is being maintained in the latest policy statement; however, a revaluation ‘backstop’ is being introduced that will require firms to obtain an updated valuation every five years, subject to certain exceptions. Rules around the requirement for valuation updates due to a fall in the market have also been amended.

The PRA has clarified that valuations can be provided by a suitably robust statistical model, which could include an automated valuation model (AVM).

A link to the near-final policy statement for these and other changes can be found here:

PS9/24 – Implementation of the Basel 3.1 standards near-final part 2 | Bank of England

On the 17 of January 2025, the PRA announced the implementation date would be postponed for a further year until 1 January 2027, seeking clarity on how Basel 3.1 will be implemented in the United States. It is understood the date for full implementation of the rules remains at 1 January 2030.