On 20 January 2026, the Prudential Regulation Authority (PRA) published PS1/26, setting out its final Basel 3.1 rule package. This confirms the final Basel 3.1 expectations in the UK and provides clarity on the implementation timeline and technical specifications ahead of the 1 January 2027 go-live date.
This blog summarises the key details about the finalised Basel 3.1 rules package in the UK, and outlines the potential capital implications for UK banks based on recent benchmarking analysis.
Final Basel 3.1 rules
The final Basel 3.1 rule package contains details on finalised operational risk rules, which remained largely unchanged from the near-final proposals consulted on across 2023-2025, aside from several minor clarifications:
- At financial year end, the current financial year must be included in the calculation of the three-year average for the purposes of the Business Indicator (alternatively, an estimate if this is unavailable).
- Several amendments were made to align UK rules with those issued by the Basel Committee on Banking Supervision, relating to legal risk and dates for loss data sets.
UK Basel 3.1 operational risk requirements will take effect from 1 January 2027, alongside credit risk and other Pillar 1 reform rules. Previously, the PRA opted to delay implementation of Basel 3.1 rules due to uncertainty around their implementation timescales in the US. As explored in the Basel III Implementation Tracker, with the publication of its final rules, the UK is on track to join other jurisdictions such as Australia, Brazil, Canada, the EU, Japan, South Africa and Switzerland in having implemented the Basel 3 framework.
Alongside Basel 3.1, the PRA confirmed the retirement of its refined Pillar 2A methodology from 1 January 2027.
With policy rules now finalised, 2026 is effectively the last full year for operational readiness in the UK banking sector and firms will be ramping up their efforts to prepare for the upcoming deadline.
Understanding the capital implications of Basel 3.1 in the UK
From 2027, the UK will fully replace existing operational risk approaches with the Basel 3.1 Standardised Measurement Approach (SMA). Capital requirements will be driven by the Business Indicator Component of the SMA calculation (calculated by multiplying the sum of Interest Lease and Dividends, Services and Financial components by defined marginal coefficients). The Internal Loss Multiplier component will be set at 1 and firms’ operational risk loss histories will therefore not influence their Pillar 1 capital requirements.
In 2025, we explored the potential impact of incoming Basel 3.1 rules in the UK and other jurisdictions as part of our Capital Benchmark study. One of the metrics benchmarked compared capital levels under existing approaches, and SMA rules.
The study indicates that UK banks may face higher capital requirements for operational risk when the SMA replaces existing capital approaches. Under the final Basel 3.1 rules, UK banks’ capital requirements under the new standardised approach for operational risk would be around 26% higher than under the current framework, based on 2025 data. This increase is broadly in line with the uplift observed for European firms (+27%) and is greater than the increase across all jurisdictions (+19%).
Breaking down the Business Indicator for the UK, the 2025 study shows that it is primarily driven by the Interest, Leases and Dividends component, which typically accounts for 54% of the total. The Services (29%) and Financial (17%) components contribute smaller proportions to the overall Business Indicator for UK firms.
Exploring the global regulatory capital landscape in 2026
In 2026, we will run a number of activities that can support you in keeping up to date with the global regulatory capital landscape and related areas:
Capital Benchmark study: Our Capital Benchmark study will run again in 2026, providing an insight into current Pillar 1 and Pillar 2 capital levels. The study benchmarks a range of metrics on both a global and regional level, including capital levels under non-SMA and SMA approaches. Economic capital and stress testing losses are benchmarked in a separate section of the report. We will be launching the study in March 2026. Please contact us if you’d like to learn more in the meantime.
Analytics Working Group (AWG) activities: In parallel, we will continue to offer our members the opportunity to engage with peers to discuss topics relating to capital modelling, stress testing and risk quantification. As part of the Analytics Working Group (AWG), members can discuss regulatory capital trends, modelled capital approaches and other areas of interest with peers.
‘Future of Operational Risk Measurement’ initiative: Finally, we are continuing to explore how risk measurement is evolving as a discipline through our ‘Future of Operational Risk Measurement’ initiative. Following a successful first phase of the project in 2025, we will be continuing our work in this space with the wider ORX membership.
