The Prudential Regulation Authority has scrapped the trading book excess allowance for exposures to third parties, replacing it with a cap of 85% of Tier 1 capital, it said on Tuesday.
Banks can currently exceed large exposures (LE) limits for each counterparty or group of connected counterparties in the trading book by up to 500% of Tier 1 capital. Excesses lasting more than 10 days are capped in aggregate at 600%.
The new rules take effect on 1 January 2028.
Under the final rules, exposures above the limit must not exceed 85% of the firm’s Tier 1 capital and must carry an additional capital requirement. The PRA said the 85% figure is “substantially lower than the current allowance” and matches the allowance for intragroup trading book exposures.
The regulator said a 100% risk weight applies to the part of an exposure above LE limits. Firms do not have to hold extra own funds equal to the full excess.
The PRA described that wording as a clarification that does not change the policy it consulted on.
Firms must still report each breach to the PRA without delay, giving the amount and the name of the client or group concerned.
The PRA also amended Article 398 of its rulebook to stop firms avoiding the 10 business day restriction by moving exposures or creating artificial transactions.
The standard LE limit is 25% of Tier 1 capital or £130m, whichever is greater. In its October 2024 consultation, the PRA argued that the extra capital firms hold under the old allowance is “likely to be small compared to the size of the maximum loss allowed”.
The PRA said it expects firms to handle temporary breaches in exceptional circumstances under Article 396 of the Large Exposures (CRR) Part of its rulebook. It had said in the consultation that the impact of removing the allowance was expected to be limited.
The regulator also confirmed that firms can no longer use internal models to calculate exposure values on securities financing transactions (SFTs). It deleted Article 390(4), which let firms with Internal Model Method permission use that method for SFTs.
The 2024 consultation pointed firms to the financial collateral method in the revised credit risk framework.
On the substitution approach, which looks through to the issuer of collateral, the exposure to the issuer is the lower of the reduction in the original exposure and the market value of the collateral. Cash collateral is excluded from the approach.
Indirect exposures to collateral issuers on transactions involving qualifying central counterparties are exempt from LE limits where the underlying exposures already are. Firms must identify and report them.
The PRA is also deleting the Large Exposures Part of its rulebook and moving its provisions into the Large Exposures (CRR) Part. It said it limited changes to those needed to give effect to the policy decisions.
The 2024 consultation proposed that the removal of internal models take effect on 1 January 2026. The PRA said industry responses delayed finalisation.
It had published a first policy statement on 17 July 2025, with 1 January 2026 as the implementation date for those amended rules. It said the remaining proposals drew more significant feedback, particularly on mandatory substitution, intragroup exposures and the trading book excess allowance.
The PRA said it has not fully reviewed the transferred rules for Basel 3.1 changes. It intends to carry out further analysis during 2027 and consult on any consequential changes.
