Part 1: Prudential regulation of credit institutions and investment firms Section 3: Transfer of certain prudential regulation matters into PRA rules
This section enables HM Treasury to revoke existing prudential regulation contained in the CRR, thereby allowing the PRA to make rules on these matters.
	Subsection (1) provides HM Treasury with the power to revoke provisions of the CRR through regulations. This includes the ability to revoke instruments made under the CRR such as EU tertiary legislation and associated UK legislation, to which the necessary changes have been made under the EUWA to ensure that the legislation continues to operate effectively following the end of the Transition Period.
	Subsection (2) restricts the extent to which this power to revoke can be exercised, by listing the matters which can be revoked in subsection (2)(a) - (p). This list of matters includes areas of the CRR that need to be updated to reflect the latest Basel reforms (including large sections where the changes stemming from the current Basel standards are substantial).
	Subsection (2)(a) relates to Common Equity Tier 1. Common Equity Tier 1 is the highest quality of regulatory capital as it absorbs losses immediately when they occur. It is mainly made up of common shares issued by a credit institution, retained earnings and/or other income and disclosed reserves.
	Subsection (2)(b) relates to the Standardised Approach to Credit Risk (SACR). Credit risk is the risk of a loss resulting from a borrower failing to repay a loan or meet contractual obligations. Credit risk accounts for the majority of most credit institutions’ exposure to potential losses, and therefore is usually the largest component of their regulatory capital requirements. SACR is one of the methods that credit institutions can use to calculate credit risk capital requirements. It typically does not require credit institutions to estimate the level of risk associated with an individual exposure – instead, they apply standard risk weightings (i.e. percentages of exposure). The risk weightings in SACR are set out in law for each exposure type (e.g. residential mortgages).
	Subsection (2)(c) relates to classification of off-balance sheet items. Off-balance sheet items refer to activities that are effectively assets or liabilities of a credit institution but do not appear on that credit institution’s balance sheet. Annex I of the CRR currently sets out the level of risk that should be associated with different off-balance sheet items. These may need to be revoked to allow the PRA to implement the latest Basel standards for SACR.
	Subsection (2)(d) relates to the Internal Ratings Based (IRB) Approach to Credit Risk. The IRB approach allows credit institutions to use their own estimates of risk parameters (e.g. the probability that a borrower may default), for the purpose of calculating credit risk capital requirements. The IRB approach was introduced as part of Basel II, but the global financial crisis highlighted a number of shortcomings in its use, which Basel III and 3.1 seek to address.
	Subsection (2)(e) relates to credit risk mitigation (CRM). CRM techniques allow credit institutions to reduce the credit risk of exposures, and therefore reduce the amount of capital required to be maintained against such exposures. Government guarantees supporting Bounce Back Loans are an example of CRM.
	Subsection (2)(f) relates to counterparty credit risk. Counterparty credit risk (CCR) is the risk that a counterparty to a transaction might not perform its contractual obligations before the transaction's cash flows are settled. CCR capital requirements cover both current exposures and estimates of potential future exposures on these transactions. Post-financial crisis, the BCBS strengthened its framework for CCR for securities financing transactions (e.g., repos and reverse repos) and derivatives.
	Subsection (2)(g) relates to operational risk, which is the risk of loss resulting from inadequate or failed processes, people and systems or from external events. The financial crisis highlighted two main shortcomings with the existing operational risk framework. First, capital requirements for operational risk proved insufficient to cover operational risk losses incurred by some credit institutions. Second, the nature of these losses – covering events such as misconduct, and inadequate systems and controls – highlighted the difficulty associated with using internal models to estimate capital requirements for operational risk. The BCBS has streamlined the operational risk framework to address these shortcomings (which the PRA have previously addressed through additional capital requirements).
	Subsection (2)(h) and (i) relates to market risk. Market risk is the possibility of credit institutions experiencing losses due to adverse price movements (e.g. in equity, bond or commodity prices, interest rate moves or exchange rates). Market risk is the third largest contributor to RWAs for a typical commercial bank, after credit risk and operational risk, but is typically a larger contributor of RWA for investment banks and investment firms. Credit institutions are able to use standardised or internal model-based approaches. The BCBS changes address deficiencies in the design and calibration of market risk calculations, which were identified following the financial crisis.
	Subsection (2)(j) relates to credit valuation adjustment risk (CVA): the risk of loss on counterparty exposures that occur as a result of a deterioration in the credit worthiness of the counterparty. This was a major source of losses for firms during the global financial crisis, exceeding losses arising from outright defaults in some instances. The initial phase of Basel III reforms introduced a capital requirement for CVA risk. This approach has since been revised by BCBS to enhance its risk sensitivity, strengthen its robustness by removing the use of internal models for this risk, and improve its consistency with approaches used in the revised market risk framework.
	Subsection (2)(k) relates to large exposures: these requirements are intended to address concentrated exposures, which could result in credit institutions suffering significant losses caused by the sudden default of a large individual counterparty or a group of connected counterparties. In April 2014, the BCBS published a final standard for measuring and controlling large exposures.
	Subsection (2)(l) relates to liquidity requirements: adequate liquidity helps ensure credit institutions are able to meet both short-term and long-term financial obligations when shocks occur. The difficulties experienced by some credit institutions during the global financial crisis arose from failures to observe the basic principles of liquidity risk management. In response, in 2008 the BCBS published Principles for Sound Liquidity Risk Management and Supervision (‘Sound Principles’), which has since been supplemented by specific measures:
the Liquidity Coverage Ratio (LCR) which aims to ensure that credit institutions have sufficiently high-quality liquid assets to survive a significant stress scenario lasting for 30 days; and
the Net Stable Funding Ratio (NSFR) which requires credit institutions to fund their activities with sufficiently stable sources of funding, measured over a one-year timeframe, in order to mitigate the risk of future funding stress.
	Subsection (2)(m) relates to the leverage ratio. An underlying cause of the global financial crisis was the build-up of excessive on- and off-balance sheet leverage in the banking system. The ensuing deleveraging process at the height of the crisis created a vicious circle of losses and reduced availability of credit in the real economy. The Basel III framework introduced a simple, transparent, non-risk-based leverage ratio, designed to reduce the risk of such periods of deleveraging in the future (and the damage they inflict on the broader financial system and economy). The leverage ratio supplements the risk-based capital requirements, by acting as a non-risk-based backstop: in essence, the leverage ratio limits a credit institution’s capital to a proportion of its on-balance sheet assets and certain off-balance sheet exposures.
	Subsection (2)(n) relates to reporting requirements. Credit institution are required to provide information to the PRA regarding their assets, risks and exposures, enabling it to assess and supervise appropriately, including assessing risks in the credit institutions’ internal models. Basel III and 3.1 include a number of updates to prudential rules, which will flow through to changes in the data/outputs that competent authorities collect from credit institutions, and therefore to reporting requirements.
	Subsection (2)(o) relates to disclosure requirements: another core component of the Basel framework is the requirement for credit institutions to publicly disclose relevant financial information, in order to support effective market discipline, often referred to as "Pillar 3". This disclosure of information enhances transparency, thereby acting as an incentive on credit institutions to conduct their business in a safe, sound and efficient manner. Since Basel II, the BCBS have released four updates to the disclosure framework, in 2015, 2017 and two in 2018. These updates are required to align disclosure requirements with the latest Basel standards.
	Subsection (2)(p) allows HM Treasury to revoke other matters in the CRR that are contained in the "CRR Basel standards", meaning outstanding Basel standards that have not yet been implemented in the UK, as defined in section 4. This power is subject to specific conditions as set out in subsections (8)-(9). This is designed to safeguard the Government against the small risk that the concepts defined in subsection (2)(a)-(o) do not adequately capture all outstanding elements of the Basel Framework, for example if the BCBS publish new standards which are not listed in section 4.
	Subsections (3) and (5) allow HM Treasury to revoke further areas of the CRR if they are connected to the matters listed in subsection (2), where they consider it necessary or desirable to do so in order to maintain or improve the coherence of the prudential regime. This will help HM Treasury and the PRA to minimise the impacts on credit institution having to refer to both retained EU law and the PRA rulebook, by enabling HMT to revoke other Articles of the CRR, which are not strictly the subject of the matters specified in subsection (2), where it would help ensure a more coherent rulebook.
	Subsection (4) sets out the conditions required in order for any revocations made in regulations by HM Treasury to become effective. The provisions can be revoked if either a) the provision will be replaced in PRA rules or b) it is appropriate for the provision not to be replaced. This aims to avoid any possibility of a gap in the prudential framework between the application of the deletions and the PRA exercising its general rule-making power.
	Subsection (6) enables HM Treasury to make different provision for different purposes, for example different provision in relation to different classes of person or transaction.
	Subsection (7) ensures that regulations made by HM Treasury are subject to the affirmative procedure.
	Subsection (8) requires HM Treasury to demonstrate to Parliament how revocations that rely on subsection (2)(p) are connected to the CRR Basel standards, which are explained in section 4.
	Subsection (9) ensures revocations made under (2)(p) can be made by virtue of the subject matter contained in the CRR Basel Standards, including where the application of that subject matter is an adapted version of the subject matter. This is intended to account for the fact that the BCBS sets standards for internationally active banks but in the UK, prudential requirements stemming from Basel are currently applied to all credit institutions, including e.g. smaller banks and building societies that focus on domestic lending. Therefore, subsection (9) allows for revocations of CRR requirements to be made which apply to firms that are not strictly the subject of Basel, e.g. smaller banks and building societies.
	Subsection (10) is self-explanatory
	Subsection (11) is self-explanatory.