CRR3 vs. UK Basel 3.1: Key Differences in Basel IV Compliance

Basel IV is here, but compliance is anything but straightforward. Banks, especially multinational institutions, must navigate deviations between the EU’s CRR3, the UK PRA’s Basel 3.1 and the global Basel framework. Key challenges include output floors, shifts in credit risk modeling and increased data requirements, which all create a complex regulatory landscape that demands adaptive compliance strategies across jurisdictions. Underscoring it all is the need for data management and technology to keep pace with regulatory velocity.

In October 2021, the European Commission published its CRR3 legislative package, introducing the revised Basel III reforms (aka Basel IV) for Euro-Area (EA) banks. A year later, the UK’s Prudential Regulation Authority (PRA) published CP16/22, which proposed the UK’s rules for the adoption of Basel IV.

Together, these publications clarified regulatory expectations and provided insights into the evolving landscape. At the same time, they highlighted key divergences in approach, signaling additional challenges for banks implementing Basel IV across jurisdictions.

Differences in EU CRR3 and UK Basel 3.1 requirements

While the Basel Committee on Banking Supervision (BCBS) establishes global banking standards, differences in implementation between the EU’s European Banking Authority (EBA) and the UK’s PRA impact a range of areas, from risk-weighting, output floors and reporting requirements.

• EU risk weighting for unrated corporate exposures: Unlike with BCBS and UK PRA requirements, the EU differentiates between a Standardized Approach (SA) run and a standardized floor run. For instance, under the SA, unrated corporate exposures carry a 100% risk weight. However, under the Internal Ratings-Based (IRB) approach, if the Probability of Default (PD) is below 5%, EU rules allow for a reduced risk weight of 65%.
• Extended transition period for output floors: While the application of output floors is phased in over five years, the EU extends the transition period by an additional three years (until 2032) for certain exposures, including unrated corporates, low-risk mortgages and derivatives.
• Apportionment of output floors across EU subsidiaries: Output floors apply at the EU group-consolidated level, but the EU mandates a specific method for allocating floored risk-weighted assets (RWAs) across subsidiaries in different EU member states. This approach distributes the impact of output floors across an EU group’s various jurisdictions.
• UK PRA-specific rules for sovereign and central bank exposures: The PRA requires sovereign and central bank exposures to be processed using the SA. Additionally, it introduces revised credit conversion factors (CCFs) for both SA and Foundation IRB (F-IRB) approaches. IRB banks must also comply with updated PD, loss given default (LGD), and exposure at default (EAD) input floors, which differ slightly from EU requirements.
• Divergence in regulatory reporting standards: The UK PRA’s draft reporting requirements introduce material deviations from the EU’s COREP reporting taxonomy, which the UK previously followed.

“Basel IV represents a significant overhaul of Basel III, but differences in implementation add further complexity for multi-regional firms. The EU’s approach to Basel IV deviates from both the BCBS guidelines and the UK PRA’s Basel 3.1 framework. Beyond Europe, globally active firms must also navigate regional variations across Asia-Pacific and the Americas, posing additional challenges to alignment.”

Many EBA and PRA rules introduce complex data collection and calculations for both IRB and SA portfolios, making it challenging for end users to interpret results. Without an efficient system in place, navigating these outputs remains difficult, regardless of the regulatory framework that applies.

For example, to meet Basel IV requirements banks must collect additional categories of data, such as:

• External ratings for corporate or bank exposures transitioning from the IRB approach to SA, as well as for SA RWA floor calculations.
• Granular collateral and exposure data to determine loan-to-value (LTV) ratios for commercial and residential real estate (CRE and RRE) exposures.
• Property income classification, specifying whether CRE and RRE collateral is income-producing.
• Borrower income source currency for RRE exposures to assess foreign exchange risk.
• Retail transactor classifications for more precise risk segmentation.
• Unrated bank classifications, assigning standardized risk weights based on Grades A, B or C.

Additionally, banks need to leverage a unified, high-quality data framework to enable what-if analyses and stress testing. Banks must run scenario analyses on both raw and simulated data to assess evolving risks and capital requirements.

Loan-splitting vs. whole-loan approaches

A key area of calculation complexity in Basel IV is the loan-splitting method adopted by the UK PRA for real estate exposures under the SA. Under this method, a 20% risk weight applies to the portion of the loan up to 55% of the property’s value, while the remaining balance is assigned a risk weight based on the counterparty’s credit profile.

In contrast, the whole-loan approach, permitted under the EBA’s CRR3 rules, applies a single risk weight to the entire loan based on its LTV ratio. Although this method is not permitted under the UK’s implementation, banks operating across jurisdictions must understand both approaches to ensure accurate regulatory compliance.

Changes in trading book treatment

Both EBA CRR3 and UK PRA Basel 3.1 set the go-live date for the Fundamental Review of the Trading Book (FRTB), which significantly restructures the market risk framework.

While IRB banks can continue using the Internal Model Method (IMM) to assess counterparty credit risk exposure at default (EAD) for derivatives, they must also apply the Standardized Approach for Counterparty Credit Risk (SA-CCR) in parallel. This is required when calculating EAD for SA floor, leverage ratio and large exposures reporting.

Additionally, both EBA CRR3 and the new UK PRA rules introduce revised regulatory collateral haircuts and a new net EAD formula for securities financing transactions (SFTs), including repos and reverse repos.

Meanwhile, the FRTB Standardized Approach (FRTB-SA) rules, in effect since 2021 for disclosure purposes, continue to be refined, requiring banks to adapt their market risk models accordingly.

“From new risk formulas to loan-splitting, Basel’s new calculations present banks with complex operational demands. Without a transparent, centralized system to efficiently manage data, navigating Basel IV compliance will prove a considerable (and costly) challenge.”

As banks work to comply with CRR3 and UK Basel 3.1, they must navigate significant regulatory complexities. Understanding the divergences between EU and UK PRA requirements is only the first step. The scale of calculation changes demands a strategic overhaul of data sourcing and architecture.

Many existing architectures, developed over years with spaghetti code or reliant on vendors lacking end-to-end regulatory coverage, may struggle to meet evolving compliance demands. To stay ahead, banks must prioritize modern, flexible systems that accommodate both global and jurisdiction-specific Basel IV requirements. Data transparency and auditability will be increasingly vital to compliance operations.