The Prudential Regulation Authority has opened a consultation on a package of targeted changes to the Basel 3.1 internal model (IMA) for market risk, proposing changes aimed at making the framework more balanced and more efficient while maintaining its prudential standards. Published on 19 June 2026 as consultation paper CP9/26, the proposals follow the PRA’s finalization of the Basel 3.1 rules in PS1/26 and respond to evidence that few firms were planning to use internal models under the framework as written.
The IMA is the most sensitive of the methods that banks can use to account for potential market risk, and its implementation has been delayed until 1 January 2028 to allow international connections, given that it is used more by large trading companies and cross-border groups. The PRA said that since publishing its final rules it had reviewed information from the Basel Committee on Banking Supervision Impact Assessment and IMA requests from firms, and identified a small number of areas where the current rules may not fully achieve their intended objectives, may be unduly burdensome, or may require additional assessment time. The regulator said it would expect an acceptable number of firms to adopt a more sensitive approach, and that the proposed reforms are expected to support a level playing field for UK banks operating internationally.
Proposals are more direct than sales. The PRA will extend the monitoring period for the profit and loss attribution test (PLAT) – to check the accuracy of the model – from one to three years, during which failure will not automatically remove the trading desk from internal modeling, allowing more evidence to be collected in the measurement of the test. It will adjust the assessment of the adequacy of the risk factor by reducing the number of guaranteed prices required to pass from 24 to 16 for small factors of liquid risk, where the capital requirements already show irregularity, and introduce a proportional requirement for new issuance. A new intermediate category of unrepresentable risk factors will be created, allowing risk factors that meet data quality standards but do not have sufficient amounts to warrant them to remain in the model of expected deficits under the surcharge, rather than being removed entirely.
Other proposals would see the diversification between the high-level approach and the IMA to remove the leverage that may arise when a company starts using internal models in part of its portfolio, instead of existing parts with a permit-based cap. The PRA also proposes to simplify operations in the management of mutual investment obligations, introducing a 90% observation limit for IMA filings, and a set of minimum definitions and important changes in reporting and disclosure.
The changes concern financial experts because they directly deal with how much capital banks should hold against trading activities and how firms judge which internal models they should accept at all. The PRA’s cost-benefit analysis estimates annual benefits to firms of between £1.8 million and £60 million, largely arising from the adoption of additional IMA and revised management of non-model risk factors. Lower operational friction and the resulting more sensitive capital may impact banks’ willingness to offer derivatives and hedging products to end users, affecting the cost and availability of risk management services used throughout the real economy.
A more balanced framework for market risk that maintains strong standards is the balance the PRA is trying to strike, and the consultation frames the adjustment as preserving the long-term standardization of Basel 3.1 rather than weakening it. The proposals also reflect a wider effort to keep UK rules in line with other major trading areas, several of which are weighing similar reforms, as timelines used in the United States and the European Union continue to shape the competitive landscape. With the consultation closing on 18 September 2026 and the IMA implementation date set for 1 January 2028, commercial banks now have a defined window to assess how the proposed changes affect their modeling and funding plans, and to respond before the rules are finalised.
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