Delay in US, EU Basel III implementation raises questions about UK timeline

The timing of the UK implementation of the final Basel III bank capital rules has become more uncertain after the EU decided to put off the adoption of part of the framework due to an expected US delay.

Finalization of the Basel 3.1 framework, as it is known in the UK, has been put on hold due to the July 4 snap election called by UK Prime Minister Rishi Sunak. While the Prudential Regulation Authority (PRA) is expected to publish the last set of Basel 3.1 rules soon after the election, developments in the EU and the US could change the PRA's original plan to start implementation from July 1, 2025.

"There is a general commitment in the UK to get the remaining Basel 3.1 changes through, so I would expect that we'll see something from the PRA, possibly in the latter part of the summer," said Sinéad Meany, a regulatory lawyer at Hogan Lovells and former head of legal at the Bank of England, in an interview.

"The PRA will want to provide transparency to firms, but it will also consider the effect on international competitiveness if the UK were to be front-running these requirements," Meany told S&P Global Market Intelligence.

– Compare banks using the Peer Analysis template on S&P Capital IQ Pro. – Request a demo on credit and market risk solutions for the final Basel III framework from Market Intelligence.

EU delay

The EU's financial services commissioner, Mairead McGuinness, said in a June 18 speech that the bloc would postpone by one year, to Jan. 1, 2026, the implementation of the fundamental review of the trading book to protect the global competitiveness of European banks.

The fundamental review of the trading book reforms would require investment banks to hold more capital against their trading books to reduce market risks related to buying and selling securities. With US implementation of the Basel standards now "highly unlikely" to take place before Jan. 1, 2026, the EU delay "ensures a global level playing field," McGuinness said.

"Rules on market risk are very important for investment banks, and there is strong competition between European, internationally active banks and other global banks," the commissioner said.

McGuinness said the EU will implement the bulk of the final Basel III standards from Jan. 1, 2025, as previously planned, and said the bloc "sincerely [hopes] that the US will apply the Basel III standards at the earliest opportunity."

US regulators signaled earlier in 2024 a potential review of their Basel III endgame package, as their reforms are known. Federal Reserve head, Jerome Powell, told the House Financial Services Committee in early March that he expected "broad and material changes" to the proposals.

The package's finalization is now expected in September at the earliest, and implementation could be pushed back to early 2026 from the previous plan to start adopting the rules from July 1, 2025, Risk.net reported June 18.

UK timeline

Implementation delays in other jurisdictions, particularly the endgame package in the US and EU spillovers, create some uncertainty about when UK legislation will be implemented, said Will Edwards, associate director at S&P Global Ratings' EMEA financial services team, in an email. UK authorities have set July 1, 2025, as the deadline for the implementation of the final Basel rules.

"It's possible that the sequencing and timing of elements in the UK approach could also shift," Edwards said.

At the same time, big UK banks are seen to be in good shape to start adopting the final Basel III requirements, with their guidance on day-one effects "illustrating a well-developed understanding of the framework's impact," Edwards said.

As of the first quarter of 2024, HSBC Holdings PLC had the highest common equity Tier 1 (CET1) ratio and the largest CET1 ratio cushion over minimum regulatory requirements among the largest UK banks, Market Intelligence data shows.

Barclays PLC and Lloyds Banking Group PLC had the smallest cushions among large European banks. Barclays and Lloyds have recently focused on boosting capital distributions to shareholders, with Barclays launching a new strategy in early 2024 and Lloyds setting a lower 2024 CET1 ratio target of 13.50% in a move to return more surplus capital to shareholders. Both banks are considered adequately capitalized.

HSBC, NatWest Group PLC, Barclays, Lloyds and Standard Chartered PLC have leverage ratios exceeding the minimum Basel III requirement, with buffers ranging from 4.8 percentage points to 5.7 percentage points, Market Intelligence data shows. Under current PRA requirements, all UK banks must hold a minimum leverage ratio of 3.25%, with global systemically important banks (G-SIBs) facing additional requirements based on their G-SIB surcharge.

Leverage ratios measure Tier 1 capital against total exposure and are designed to limit the build-up of leverage on banks' balance sheets.