On 22 May 2025, the Prudential Regulation Authority (PRA) published a policy statement on Pillar 2A SME and infrastructure lending adjustments. These adjustments aim to mitigate the impact of removing the SME and infrastructure support factors under Pillar 1, as part of the PRA’s implementation of the Basel 3.1 standards. The proposals focus on maintaining the competitiveness of UK firms and minimising disruption to SME and infrastructure lending, while ensuring prudent capital requirements.
PRA policy statement on Pillar 2A SME and infrastructure lending adjustments
On 22 May 2025, the PRA published a policy statement on Pillar 2A SME and infrastructure lending adjustments. These adjustments aim to mitigate the impact of removing the SME and infrastructure support factors under Pillar 1, as part of the PRA’s implementation of the Basel 3.1 standards. The proposals focus on maintaining the competitiveness of UK firms and minimising disruption to SME and infrastructure lending, while ensuring prudent capital requirements.
Scope of eligible exposures
- Adjustments will apply to exposures meeting the eligibility criteria previously set out for the SME and infrastructure support factors in Articles 501 and 501a of the CRR. Exposures supporting buy-to-let businesses are excluded.
- Eligible exposures include those arising both before and after the Basel 3.1 implementation date.
Calculation approach
Adjustments will be calculated using a firm-specific methodology that includes two components: the change in risk-weighted assets (RWA) resulting from the removal of the support factors, and a capital adjustment factor (CAF) to convert the RWA into the Pillar 2A adjustment. Adjustments will be firm-specific and calibrated to avoid double discounts or imprudently low capital requirements.
Interaction with the Output Floor
- The methodology for calculating the Pillar 2A lending adjustments will be based on the underlying approach used to calculate RWAs for SME and infrastructure exposures, regardless of whether a firm is bound by the output floor.
- The PRA will not require firms to recalculate their Pillar 2A lending adjustments if they become bound by the output floor. This approach is consistent with the PRA’s view of the output floor as an aggregate backstop measure and its statement in PS9/24 that firms need not change granular risk weights when bound by the output floor.
Reporting requirements
Firms must submit data templates detailing eligible SME and infrastructure exposures, including RWAs, risk weights, and support factors. These submissions will be required:
- For the one-off day 1 adjustments as part of the Basel 3.1 data collection exercise.
- Subsequently, alongside ICAAP submissions, aligned with the firm’s C-SREP cycle
Next steps
The near-final policy will take effect on the same date as the PRA’s implementation of the Basel 3.1 standards. Firms must submit required data for eligible exposures to benefit from the adjustments. The PRA will finalise the policy alongside its simplified capital regime for Small Domestic Deposit Takers (SDDTs).
If you would like to discuss anything raised in this article, feel free to contact our Financial Regulation team.
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