PRA retires the refined methodology to Pillar 2A

Bank capital rules work in layers. Pillar 1 sets minimum capital for every firm, and Pillar 2A is the extra capital the Prudential Regulation Authority (PRA) sets for each firm for risks that Pillar 1 does not fully cover (SoP5/15 (external site)). The refined methodology was a way to adjust the credit risk part of Pillar 2A, and the PRA retires it for all firms from 1 January 2027 (PS2/26 (external site)).

Under the refined methodology, some firms considered relatively low risk and well managed could "compare their CR SA risk weights with those derived from 'IRB benchmarks'" (CP9/24 (external site)). CR SA is the standardised approach for credit risk; the IRB benchmarks come from the risk weights of firms that use internal models.

Until the end of 2026, a firm on the standardised approach could ask for this comparison. Where its standardised risk weights were much higher than the benchmarks, the Pillar 2A amount for credit risk could be reduced (CP9/24 (external site)).

From 1 January 2027 the comparison is no longer available, and the reporting linked to it is no longer required (PS15/26 (external site)). As an example only: a firm with a Pillar 2A requirement of 3 percent of risk-weighted assets, of which 0.4 percentage points came off through the refined methodology, would no longer have that reduction.

The PRA's reason is that the Basel 3.1 rules serve a broadly similar function. For low loan-to-value owner-occupier mortgages, it estimated that standardised risk weights around 5.5 times the IRB average could fall to between 1.5 and 2.5 times (CP9/24 (external site)).

The change applies to all PRA-regulated firms in the Pillar 2A framework, including small domestic deposit takers (PS2/26 (external site)). The roles most directly concerned:

• Capital Reporting Analyst: recalculates the Pillar 2A amount and capital ratios without the adjustment.
• Regulatory Reporting Analyst: stops the returns linked to the refined methodology.
• Credit Risk Analyst: reads standardised risk weights without a Pillar 2A offset behind them.
• Regulatory Consultant (Banking): explains the combined effect of Basel 3.1 and the retirement on capital plans.

The PRA proposed the retirement in September 2024 (CP9/24 (external site)) and published a near-final policy in October 2025 (PS18/25 (external site)). The final policy statement of 20 January 2026 made no changes to it (PS2/26 (external site)).

The retirement takes effect on 1 January 2027, the start date of the Basel 3.1 rules (PS1/26 (external site)). The updated Statement of Policy on Pillar 2 methods applies from the same date (SoP5/15 (external site)).

The PRA introduced the refined methodology in 2017, when it refined its Pillar 2A capital framework (PRA publication (external site)). The aim was to reflect cases where standardised risk weights were much higher than those produced by internal models for similar exposures.

The PRA also judged the methodology particularly complex for both itself and firms to implement (CP9/24 (external site)). It found no compelling new evidence in the consultation responses to keep it (PS18/25 (external site)).