Basel 3.1

Bank supervision - UK.

In the UK context, Basel 3.1 means the elements of Basel III that had not already been implemented in the UK by 2021.

Basel 3.1 has particular significance in relation to the calculation of Risk Weighted Assets by banks, and related costs for their corporate customers.

What is changing?

"One key change which will impact corporates is the conversion factor (CF) associated with performance guarantees (incl. bid bond, advance, performance & retention guarantees).

The proposal is to increase this from 20% CF to 50% CF.

The CF defines the probability that a contingent liability exposure (such as a performance guarantee) will convert to an on balance sheet obligation for the bank when a claim is made by the beneficiary and the obligor fails to make payment under the guarantee.

The capital that the bank is required to keep for performance guarantees is linearly proportional to the CF and it is likely that banks will need to pass on this additional capital charge.

For example, for a corporate with an external S&P rating of ‘A’, if the existing pricing for such a performance guarantee was 0.4%, this would increase to 1%."

Naresh Aggarwal, Associate Director, Policy & Technical, ACT - February 2023.

See also

• Advance payment bond
• Bank supervision
• Basel III
• Basel IV
• Beneficiary
• Bid bond
• Capital
• Capital adequacy
• Contingent liabilities
• Contingent risk
• Corporate
• Credit Conversion Factor (CCF or CF)
• Credit rating
• Guarantee
• Obligor
• Off balance sheet risk
• Performance guarantee
• Prudential Regulation Authority
• Retention bond
• Standard & Poor's (S&P)

Other resource

Potential rise in the cost of performance guarantees due to Basel 3.1 - ACT