PS18/25 – Retiring the refined methodology to Pillar 2A – near–final
Executive Summary
PS18/25, published by the PRA on 28 October 2025, retires the "refined methodology" for Pillar 2A capital calculations, replacing it with reliance on the Basel 3.1 Credit Risk Standardised Approach (CR SA) for greater risk sensitivity, transparency, and proportionality. This near-final policy simplifies the Pillar 2A framework, reduces administrative burdens, and aligns with broader Basel 3.1 implementation and the Strong and Simple regime for Small Domestic Deposit Takers (SDDTs), promoting safety, soundness, and competition. It matters because it directly impacts credit risk capital add-ons for affected firms, requiring updates to ICAAP/SREP processes ahead of Basel 3.1 timelines. #
What Changed
- Retirement of Refined Methodology: Eliminates supervisory adjustments to Pillar 2A credit risk add-ons based on IRB benchmarking, as Basel 3.1 CR SA better captures risks and reduces gaps between standardised and IRB approaches. - Policy Material Updates: - Near-final amendments to Statement of Policy (SoP) 5/15 – The PRA’s methodologies for setting Pillar 2 capital. - Final amendments to Supervisory Statement (SS) 31/15 – The Internal Capital Adequacy Assessment Process (ICAAP) and Supervisory Review and Evaluation Process (SREP). - Descope of SDDTs from SoP5/15 and SS31/15, with new SoP5/25 and SS4/25 for SDDTs focusing on short, sharp credit shocks. - IRRBB and Pension Obligation Risk: Clarifications only (no substantive changes); minor IRRBB updates in SS31/15 deferred due to o
What You Need To Do
- Review and update internal Pillar 2A methodologies, ICAAP/SREP documentation to remove refined methodology reliance and align with Basel 3
- Model/calculate potential capital impacts from CR SA changes vs
- Prepare for IRRBB/pension risk clarifications in SS31/15 submissions from 1 July 2026; monitor CP12/25 review
- Engage PRA supervisors on firm-specific transitions; update reporting (e
- Firms may apply changes early in ICAAP from relevant dates (e
Key Dates
Compliance Impact
Urgency: High – Firms must act now to recalibrate Pillar 2A capital ahead of Basel 3.1 and 1 July 2026 effective dates, as retirement eliminates adjustments that reduced add-ons for low-risk CR SA firms, potentially increasing capital requirements despite Basel 3.1 offsets. Non-compliance risks supervisory scrutiny in SREP/ICAAP, higher Pillar 2A requirements, and misalignment with simplified regi
Who is Affected
Summary
Policy statement 18/25