International standards for internationally active banks

The BCBS is continuing to pursue a series of follow-up initiatives building on the findings of its analytical work of the 2023 banking turmoil. These include prioritising work to strengthen supervisory effectiveness and identify issues that could merit additional guidance at a global level. They also include additional follow-up analytical work to assess whether specific features of the Basel Framework for internationally active banks, such as liquidity risk and interest rate risk in the banking book, performed as intended during the turmoil. An update on this work is expected in early 2025. Work on addressing 'window dressing' behaviour by some banks in the context of the framework for global systemically important banks will also continue in 2025.

Meanwhile, the BCBS continues to encourage full, timely and consistent adoption and implementation of the Basel standards. The final Basel III standards were agreed by the Group of Central Bank Governors and Heads of Supervision in December 2019 with adjustments to the market risk framework endorsed in January 2019.
 
The final Basel standards have been designed to restore credibility in the calculation of risk-weighted assets (RWAs) and improve the comparability of banks' capital ratios by: (i) enhancing the robustness and risk sensitivity of the standardised approaches for credit risk, credit valuation adjustment (CVA) risk and operational risk; (ii) constraining the use of the internal model approaches, by placing limits on certain inputs used to calculate capital requirements under the internal ratings-based (IRB) approach for credit risk and by removing the use of the internal model approaches for CVA risk and for operational risk; (iii) introducing a leverage ratio buffer to further limit the leverage of global systemically important banks (G-SIBs); and (iv) replacing the existing Basel II output floor with a more robust risk- sensitive floor based on the Committee's revised Basel III standardised approaches.

The implementation date, initially set for 1 January 2022, was deferred by one year in response to the Covid-19 crisis to 1 January 2023 with a five-year phase in for some elements (notably the output floor). The Bank for International Settlements (BIS) reported in October 2024 that as at the end-September 2024, around half of the BCBS's 27 member jurisdictions had published final rules for the revised credit risk, market risk and operational risk standards and the output floor. As a result of this progress, the BIS further reports that more than two-thirds of member jurisdictions have now published final rules for all the final elements of Basel III and these standards are in force in more than a third of member jurisdictions.

Notably, however, efforts in the US to implement Basel III have stalled, and it remains unclear whether, when and how the US will implement the standards.

The EU and U.K. have published final (or at least “near-final” in the U.K.) rules to implement the final Basel III standards. Implementation is set for 1 January 2025 in the EU, and the PRA has proposed 1 January 2026 for implementation in the U.K., though given ongoing uncertainty around implementation in the US, firms await the final rules for certainty. As jurisdictions take differing approaches to the substance and timing of implementation, firms are faced with the challenges arising from differential capital requirements in different jurisdictions. Given the prominence of the US banking sector, any retreat from the international standards may have knock-on effects elsewhere, with banks in those jurisdictions which have implemented Basel III likely to lobby for more favourable treatment to enable more effective competition in international banking.

U.K.

In line with the U.K.'s post-Brexit regulatory framework for financial services, implementation of the final Basel III standards in the U.K. (referred to as Basel 3.1) will be affected mainly by additions and amendments to the PRA Rulebook and other PRA supervisory materials. HMT will revoke provisions of the U.K.'s version of the Capital Requirements Regulation (CRR) that was assimilated into U.K. law as the new standards come into effect.

The PRA has published its policy on the implementation of Basel 3.1 in two parts. In each instance the PRA describes the policy as “near-final” rules but confirms that it does not intend to change the policy or make substantive alterations to the instruments before the making of the final policy material.

The first set of near-final rules on market risk, CVA risk, counterparty credit risk and operational risk was published December 2023. The second, containing the final policy on credit risk, the internal ratings based (IRB) approach to credit risk, credit risk mitigation, the output floor, disclosure and reporting, was published in September 2024. In that second policy statement, the PRA deferred the implementation date from 1 July 2025 to 1 January 2026 with a transitional period expiring on 1 January 2030. HMT also published a policy update on its approach to revoking the U.K. CRR, including issues relating to Basel 3.1 in September 2024.

The PRA intends to publish the final versions of the rules and related supervisory material on the Basel 3.1 reforms in a single final policy statement after HMT has made commencement regulations to revoke the provisions in the U.K. CRR that will be replaced by PRA rules. The PRA has indicated that this should be in Q1 2025, but again, given residual uncertainty around implementation in the US, it remains subject to change. It expects to publish the final version of the reporting taxonomy for the technical implementation of Basel 3.1 at the same time.

EU

Regulation (EU) 2024/1623 (CRR III) and Directive (EU) 2024/1619 (CRDVI) were published in the Official Journal of the European Union on 19 June 2024. The package contains the EU's implementation of the final Basel III standards, ESG prudential requirements (see Sustainability and ESG section above) and proposals to provide stronger tools for supervisors overseeing EU banks. In particular, (i) a clear, robust and balanced "fit-and-proper" set of rules, where supervisors assess whether senior staff have the requisite skills and knowledge for managing a bank (see Cross Sector section discussion of individual accountability above); (ii) better tools to oversee fintech groups, including bank subsidiaries; and (iii) proposals seeking to harmonise the authorisation and supervision of third country banks and systemic investment firms.

Non-EU banks are avidly anticipating individual member state transposition of the new branch requirements in CRDVI, assessing the impact on their various business lines and planning for compliance. National implementing legislation will emerge in 2025 with the deadline for transposition being 10 January 2026 and the prohibition on the provision of cross-border banking services taking effect from 11 January 2027. The EBA is to report by 10 July 2025 on whether to extend an exemption to the prohibition on cross-border services provided to credit institutions to include other financial sector entities. See our briefings on "EU proposal to regulate third country providers of financial services" "CRDVI cross-border rules take shape, CRDVI what EU branches of third country banks need to know" and "New licensing requirements for cross-border lending into Europe" for further information.

CRR III contains the EU's final Basel III implementation and applies generally from 1 January 2025. In July 2024, the European Commission adopted a delegated act to postpone by one year (i.e., until 1 January 2026) the date of application of the Fundamental Review of the Trading Book (FRTB) standards for banks' calculation of own funds requirements for market risk. This was considered necessary “to preserve the global level playing field for internationally active European banks in respect to their trading activities” given that other major jurisdictions have yet to finalise their rules and communicate their timelines for implementation. During the one-year postponement period, institutions should continue to use their current (pre-FRTB) methodologies to calculate their own funds requirements for market risk. In parallel, the FRTB Standardised Approach will be used for the output floor calculation. These elements therefore need to continue to be reported to competent authorities based on the current reporting requirements.

Investment firms prudential regimes

U.K. IFPR

MIFIDPRU, the prudential sourcebook for solo-regulated investment firms, defines regulatory capital through a number of cross-references to a “frozen in time” version of the U.K. Capital Requirements Regulation. The FCA intends to remove these references, bringing the definition into MIFIDPRU, amending where necessary to be more applicable to investment firms. It intends to consult on removing these references in Q1 2025, which may result in changes to the eligibility or quantum of regulatory capital of U.K. investment firms.

EU IFR/IFD

In February 2023, the European Commission sent a call for advice to the EBA and ESMA asking for their joint report on the prudential framework for investment firms that has applied since June 2021. This call for advice was in relation to the Commission's mandate to report, with legislative proposals if necessary, by 26 June 2024 on topics including: the conditions for investment firms to qualify as small and non-interconnected firms, the modification of the definition of credit institution in the CRR to include systemically important investment firms, the framework for equivalence in financial services, the Article 1(2) conditions for investment firms to apply the requirements of the CRR, the provisions on remuneration in the IFD and the IFR as well as in the AIFMD and the UCITS Directive with the aim of achieving a level playing field for all EU investment firms, and the co-operation of the EU and member states with third countries in the application of the IFD and IFR.
 
In June 2024, the EBA and ESMA issued a joint discussion paper and data collection concerning the European Commission's call for advice. The deadline for responses was 3 September 2024. The EBA and ESMA intended to publish the final report in response to the Commission's call for advice by December 2024. As such, 2025 may see legislative proposals from the European Commission to amend the EU's prudential framework for investment firms and or the boundaries between the prudential regimes for credit institutions and investment firms.

CRDVI will amend, from 11 January 2026, Article 8a of the Capital Requirements Directive which prescribes the requirements for the authorisation of significant investment firms as credit institutions. In particular, the amendments clarify that the group asset test threshold applies to all “undertakings in the group established in the EU, including any of its branches and subsidiaries established in a third country”. The EBA's final RTS to specify the methodology for calculating the thresholds may now follow in 2025. Those investment firms for which the relevant EUR 30bn threshold cannot be determined without the guidance provided in the EBA RTS will keenly anticipate any such development to identify the relevant prudential regime to be applied.

Prudential regimes for cryptoasset exposures

The BCBS has also published standards for internationally active banks on the prudential treatment of cryptoasset exposures which it initially expected its members to implement by 1 January 2025. In May 2024, it was announced that the implementation date would be deferred by a year to 1 January 2026, to ensure that all members were able to implement the standard in a full, timely and consistent manner.
 
The standards divide cryptoassets into two groups. Tokenised traditional assets and stablecoins with effective stabilisation mechanisms that meet classification conditions will attract the same own funds requirements as their reserve assets or the assets they refer to, with the possibility for supervisors to impose add-ons. The second group, which comprises the riskiest forms of cryptoassets, are to be risk-weighted at 1,250% unless they meet certain hedging recognition criteria, in which case they must be treated according to market risk rules. Holding limits will also apply to
the second group of assets. Banks would also be required to perform due diligence to ensure that they have an adequate understanding of the stabilisation mechanisms of stablecoins to which they are exposed, and the effectiveness of those mechanisms. As part of the due diligence performed, banks would be required to conduct statistical or other tests demonstrating that the stablecoin maintains a stable relationship in comparison to the reference asset.

The BCBS published its final expectations on disclosure requirements related to banks' cryptoasset exposures in July 2024, which include a standardised disclosure table and set of templates for banks' cryptoasset exposures. Banks are expected to make qualitative disclosures on an annual basis on their activities related to cryptoassets and the approach used in assessing the classification conditions. They should also make disclosures on a semi-annual basis on: (i) cryptoasset exposures and capital requirements; (ii) accounting classification of exposures to cryptoassets and cryptoliabilities; and (iii) liquidity requirements for exposures to cryptoassets and cryptoliabilities.

U.K.

On 12 December 2024, the PRA published a data request for information on firms' current and expected future cryptoasset exposures and firms' application
of the Basel framework for the prudential treatment of cryptoassets. This data gathering exercise will inform the PRA and Bank of England's work on the calibration of the prudential treatment of cryptoasset exposures, the analysis of costs and benefits of different policy options, and how the regulators will monitor the financial stability implication of such cryptoassets. Firms are
asked to complete the information request at the highest level of U.K. consolidation, to the extent it is relevant to their business, exposure or activities. The deadline for comments is 24 March 2025.

The FCA will publish a discussion paper on trading platforms, intermediation, lending and staking and prudential requirements (prudential considerations for cryptoasset exposures) and a consultation paper on stablecoins, custody and prudential requirements (proposing to introduce a new prudential sourcebook, including capital, liquidity and risk management) in H1 2025. This will be followed by consultation on trading platforms, intermediation, lending and staking, and on remaining material for a prudential sourcebook (groups and reporting) anticipated in Q4 2025/Q1 2026. The FCA anticipates that all policy statements and final made rules will be published in 2026, with the FCA's cryptoasset regime going live later in 2026. See the Fintech/Digital Assets section below for further discussion of the U.K.'s future cryptoasset regime.

EU

In the EU, CRR III requires the Commission to submit a legislative proposal by 30 June 2025 to implement the BCBS standard and specifies the prudential treatment applicable to banks' cryptoasset exposures in the transitional period until implementation of such legislation. That transitional treatment is required to take into account the legal framework introduced by MiCAR.

During the transitional period, tokenised traditional assets, including e-money tokens, should be recognised as entailing similar risks to traditional assets and cryptoassets compliant with MiCAR and referencing traditional assets other than a single fiat currency should benefit from a capital treatment consistent with the requirements of MiCAR. Exposures to other cryptoassets, including tokenised derivatives on cryptoassets different from the ones that qualify for the more favourable capital treatment, should be assigned a 1,250% risk weight. It also prescribes exposure limits.

CRR III also requires firms to disclose prescribed information on cryptoassets and cryptoasset services as well as any other activities related to cryptoassets. This includes direct and indirect exposure amounts, the total risk exposure amount for operational risk, the accounting classification for cryptoasset exposures, a description of the business activities related to cryptoassets and their impact on the risk profile of the institution and a description of their risk management policies related to cryptoasset exposures and cryptoasset services.

As discussed further in the Fintech/Digital Assets section below, MiCAR commenced application on 30 June 2024 as regards Titles III and IV on issuers of asset-referenced tokens (ARTs) and e-money tokens (EMTs) respectively. The EBA has published its package of final technical standards and guidelines under MiCAR on prudential matters, namely own funds, liquidity requirements, and recovery plans for issuers of ARTS and EMTs. The European Commission adopted Delegated Regulations with regards to the RTS on the adjustment of own funds requirement and minimum features of stress testing programmes in December and they will enter into force in early 2025, 20 days after publication in the Official Journal. The rest are anticipated to follow imminently. The guidelines on recovery plans have applied since November 2024.

Progress on development of U.K.'s post-brexit regulatory framework

Consistent with the general reforms to the U.K.'s post-Brexit regulatory framework for financial services (see the Cross-sector section for further discussion), the U.K. government intends to revoke U.K. CRR and other EU law relating to the prudential regulation of PRA regulated firms, which forms part of assimilated law post-Brexit, and intends for it to be replaced, for the most part, with PRA rules and statements of policy.

The first elements to be revoked are those parts of U.K. CRR that have been or will be replaced by PRA rules implementing Basel standards (see further discussion above) but workstreams are also underway in respect of provisions relating to the definition of capital, TLAC, the level of application of requirements, securitisation capital requirements, counterparty risk, settlement risk and capital buffers.

In 2025, HMT and the PRA aim to finalise their policy on transferring the CRR definition of capital provisions to the PRA Rulebook and consult on transferring the remaining provisions of U.K. CRR into the PRA Rulebook. An update from HMT in September 2024 clarified that while all non-Basel related CRR revocations will likely be covered in one set of commencement regulations, draft commencement regulations covering the definition of capital provisions have been published first as they relate to the PRA's proposed new rules for its small domestic deposit takers regime (see further below). HMT is also expected to set out its intended approach to restating the CRR equivalence regimes in legislation in due course. HMT has already stated that it does not intend to restate the effects of the Article 142 CRR equivalence regime.
 
In September 2024, the PRA confirmed that it was reviewing the leverage ratio requirement thresholds. If this review identifies a need for changes, the PRA expects to publish a consultation paper in Q1 2025. In the meantime, the PRA published a direction for modification by consent relating to the Leverage Ratio: Capital Requirements and Buffers Part, the effect of which is to disapply the entire Part. The modification is available to a firm that did not meet the leverage ratio requirement thresholds before 10 September 2024 but expects to meet the criteria after the next accounting reference date or any accounting reference date before 31 December 2025. The purpose of the modification is to disapply the Part until the review is complete. It will cease to have effect at the end of 30 June 2026, although the PRA may revoke it earlier, following the completion of the review.

The PRA is also consulting on amendments to the large exposures framework, including proposals to remove the possibility for firms to use internal model methods to calculate exposure values to securities financing transactions, introducing a mandatory substitution approach to calculate the effect of the use of credit risk mitigation techniques, and amending the limits to trading book exposures for third-party exposures and for exposures to intragroup entities. The deadline for responses is 17 January 2025. The PRA intends that these reforms will take effect shortly after publication of the final policy statement, and the draft text indicates that the majority of the reforms are intended to take effect on 1 June 2025. The exception is the proposal to remove the possibility for firms to use internal model methods to calculate exposure values to securities financing transactions, which is expected to take effect on 1 January 2026.

The PRA additionally intends to introduce new rules on step-in risk (the risk that a bank provides financial support to an unconsolidated entity that is facing stress, in the absence of, or in excess of, any contractual obligations to provide such support). Banks that do not qualify as small domestic deposit takers (see further below) will be required to undertake regular assessments to ensure that they are appropriately identifying and managing step-in risk and to consider whether further actions are required to mitigate step-in risk in certain cases. The PRA will also publish a supervisory statement on step-in risk in 2025. The proposed date for implementing these reforms is 1 January 2026.

U.K. strong and simply regime

The PRA continues its work on developing a proportionate prudential framework for PRA regulated banks and building societies that are not systemically important and are focused on deposit taking from, and lending to, households and corporates in the U.K..

The PRA anticipates a layered prudential regime, with the requirements applicable to what the PRA terms "small domestic deposit taker” firms (SDDTs) being the most proportionate through to the application of rules based on the Basel framework applicable to the more sophisticated, large or complex firms.

The scope of the small domestic deposit taker regime was confirmed by the PRA in December 2023 together with the PRA's policy on liquidity and disclosure requirements for SDDTs. This was "phase 1” of the development of the new regime. Proposals on “phase 2” for simplifying all elements of the capital stack and the calculation of regulatory capital and additional liquidity simplifications for SDDTs were published in September 2024 with the final policy anticipated in 2025.

The SDDT regime operates on an opt-in basis. Firms meeting the SDDT criteria (SDDT-eligible firms) can enter the regime by consenting to a Modification by Consent (MbC) to become an SDDT.

SDDT firms will not be required to implement the Basel
3.1 reforms but may choose to do so if they wish. If they do not implement Basel 3.1, they will continue to apply the existing Basel III rules until the SDDT capital regime is implemented (anticipated January 2027). SDDT- eligible firms wanting to take advantage of this interim capital regime should inform the PRA by 28 February 2025 otherwise the PRA will assume that such firms have chosen to be subject to the Basel 3.1 standards from 1 January 2026 , subject to any movement of the Basel 3.1 implementation date.

Remuneration

U.K.

In November 2024, the FCA and PRA published a joint consultation on remuneration, which closes for comments on 13 March 2025. Final policy is anticipated in H2 2025 with entry into force the day after publication.

This consultation is the third to chip away at remuneration rules derived from the EU following the removal of the bonus cap and enhancing proportionality for small dual-regulated firms, both in 2023. Sam Woods, Bank of England Deputy Governor for Prudential Regulation and PRA Chief Executive, foretold of some of the proposed amendments in his Mansion House speech in October 2024 on "competing for growth". The stated aim of the proposed amendments is to make the dual-regulated firms' remuneration regime more effective, simple and proportionate, while facilitating each regulator's primary objectives.

The regulators are proposing to: (i) reduce the number of individuals subject to the remuneration rules (Material Risk Takers (MRTs)); (ii) simplify the approach for identifying MRTs, placing more emphasis on firms to own and safeguard the process; and (iii) bring rules on deferral of variable remuneration more in line with international practice and ensure that variable remuneration better reflects risk taking outcomes and individual responsibilities.

Currently, rules governing the scope of the requirements contain minimum qualitative (role based) and quantitative (remuneration based) criteria. The regulators propose to simplify the identification process with a single quantitative threshold (the 0.3% of highest earners).

They also propose to move the MRT identification criteria out of rules and into expectations, giving firms more flexibility and discretion.

The regulators further propose to remove the requirement to seek regulatory approval to exclude from MRT categorisation individuals that qualify solely by tripping the quantitative threshold. Expectations around governance arrangements are enhanced to ensure that relevant functions are involved throughout the process and there will be an expectation that firms document the MRT identification process.

The FCA proposes to change the structure of SYSC 19D so that it largely cross-refers to the PRA's Remuneration Rules for better consistency and alignment.

The regulators intend to consult on the onshoring of relevant European remuneration guidelines or regulations in the future.

EU

The first data collection under the guidelines on the benchmarking of diversity practices, including diversity policies and gender pay gap, under CRD IV and the Investment Firms Directive will be conducted in 2025 with a reference date of 31 December 2024.

Ring-fencing

U.K.

In November 2024, HMT published a response to the September 2023 consultation on “A smarter ring-fencing regime" and laid a draft SI in parliament to implement the new regime. This followed the final report of the Ring-fencing and Proprietary Trading Independent Review, led by Keith Skeoch (the Skeoch Review) published in March 2022 and the previous government's announcement, as part of the Edinburgh reforms in December of that year, that it intended to take forward a number of the report's recommendations on near-term reforms.

The Skeoch Review addressed itself to an existential question—whether ring-fencing is really necessary in the post-global financial crisis era given other regulatory developments (in particular, in recovery and resolution)—and to a series of narrower questions around the technical operation of the regime.

The draft Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024 amends the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014 (CAO) and the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 (EAPO) to address the questions around the technical operation of the regime. It also makes minor amendments to the CAO and the EAPO to remove EU-related expressions that are no longer relevant to the U.K..

The draft Order will come into force on the twenty- second day after the day on which it is made, anticipated in early 2025.

The Order amends the ring-fencing deposit thresholds including the introduction of a secondary threshold to exempt retail-focused banking groups from the regime. It makes architectural reforms, in particular removing the geographic restrictions on where ring-fenced banks can operate and introduces a four-year transition period for complying with the ring-fencing regime where ring-fenced banking groups acquire another bank that is not subject to ring-fencing. It also expands the list of permitted products and services including to facilitate investments by ring-fenced banks in SMEs and introduces a de minimis threshold for excluded activities.

The PRA consulted in September 2023 on proposed rule and policy updates in respect of the establishment and maintenance of third country branches and subsidiaries within ring-fenced body sub-consolidation groups. The final policy outcomes of that consultation are anticipated to coincide as closely as possible with the removal of the legislative prohibition on non-EEA branches and subsidiaries. This was initially expected to occur in H1 2024 but there is no mention of this policy development in the interim regulatory initiatives grid published in October 2024. On the basis that the draft Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024 has been laid, we still anticipate this imminently.

The PRA also intends to consult in due course on reforms to the Ring-fenced Bodies Part to reflect the findings set out in its January 2024 report on the review of these rules. Although the review concluded that most rules were performing satisfactorily and that no significant gaps had been identified, it did identify a number of areas that might be the subject of further consultation. In particular, the PRA is considering changes in respect of governance, continuity of provision of services, policies and procedures on arm's-length transactions and data reporting and notifications. Again, however, it has not indicated its timetable for these reforms.

Recovery and resolution

On the existential question, recognising the increasing alignment and overlap between recovery and resolution, the Skeoch Review made a long-term recommendation to align the ring-fencing regime with the resolution regime. In September 2023, HMT published a summary of responses to its call for evidence on the issue. The interplay between the two regimes, and questions as to how far each secures financial stability and imposes costs, are complex and politically and commercially sensitive. The responses to the call for evidence reflect the divergence of views and interests across stakeholders, and as a result do not present a coherent way forward on the questions raised by the Skeoch Review. The previous government indicated that it would continue to consider options for reform over the medium-to-long term. Although the November 2023 Regulatory Initiatives Grid indicated that the policy response to the call for evidence would be published in the second half of 2024, it has not been and there is no mention of this policy development in the interim regulatory initiatives grid published in October 2024. Perhaps this simply means that it is now to be expected post Q1 2025 (the horizon covered by the interim regulatory update).
 
In December, the FSB published its resolution report for 2024. The report takes stock of the resolution-related work of the past year and sets out the FSB's 2025 priorities in the resolution area.

Ensuring an effective resolution framework for the banking sector has been a significant focus for the FSB. The bank failures in 2023 provided several lessons for resolution planning and for the broader elements of the crisis management framework for banks. In the coming year, the FSB will continue to address areas that remain outstanding, specifically: (i) advancing the work on operationalising the use of transfer tools in resolution; (ii) sharing information and enhancing monitoring of implementation of public sector backstop funding mechanisms; (iii) supporting the work on open bank bail-in execution and securities law compliance, building on the 2024 technical work; and (iv) promoting cross-border cooperation and information sharing with authorities outside of crisis management groups.
The FSB will also seek to advance the resolution framework for insurers and central counterparties.

U.K.

Consistent with the general reforms to the U.K.'s post Brexit regulatory framework for financial services (see Cross-sector section for further discussion), the U.K. government intends to revoke assimilated law relating to the implementation of Directive 2014/59/EU (BRRD), including delegated regulations that supplemented the BRRD, replacing it with regulator's rules and statements of policy. To date, no timeframe for this revocation has been given.

In September 2024, HMT announced its intention to bring into force the revocation of certain U.K. CRR requirements, including the total loss absorbing capacity (TLAC) provisions and the Bank of England is consulting on restating in the minimum requirements for own funds and eligible liabilities (MREL) statement of policy, with modifications, most of the U.K. CRR TLAC provisions.
The Bank of England aims to take the opportunity of the U.K. CRR revocation to consolidate, simplify, clarify and remove opportunities for arbitrage between the two existing regimes, without significantly increasing the burden on firms in practice. To do so it proposes to combine the previously separate (but largely similar) onshored TLAC regime with the existing U.K. MREL regime set out in the Bank's MREL statement of policy.

The Bank of England is also consulting on broader amendments to its approach to setting MREL and is expected to finalise its policy in H1 2025 with the majority of proposed changes set to apply from 1 January 2026.

Depositor protection

The U.K.'s Deposit Guarantee Scheme Regulations 2015 require the PRA to review the compensation protection limit every five years and the deadline for the next review falls on 31 December 2025. The PRA has indicated that it intends to consult in Q1 2025.

The bank resolution (recapitalisation) bill 2024-25

In the U.K., in 2024 HMT published proposals to “enhance and keep up to date” the U.K.'s special resolution regime, in response to lessons learned from the March 2023 events. The government proposes to introduce a new mechanism which would provide for greater optionality in terms of sources of capital for a small firm and would be used alongside the existing resolution powers.

The new mechanism would allow the Bank of England to use funds provided by the banking sector to cover costs associated with a resolution, including those associated with recapitalising and operating the failed bank. As with the current depositor protection arrangements, these funds would be provided by the FSCS as needed in the event of a failure, and subsequently funded by a levy on the banking sector. The government expects that this would be used primarily to resolve small banks, given that larger banks are already required to hold a certain amount of their own equity and debt that can be drawn on to recapitalise them when they fail.

The Bank Resolution (Recapitalisation) Bill 2024-25 will introduce the necessary legislative changes required to implement this new mechanism. It had its first reading in the House of Lords in July 2024 and its third reading on 12 November. It has now passed to the House of Commons where it had its first reading on 13 November.
 
The date of its second reading in the House of Commons is yet to be announced but it is likely to make progress in early 2025.

An opposition amendment to the Bill made in the House of Lords specified that the Bank of England cannot use these powers in respect of a bank that is required to maintain an end-state MREL exceeding minimum capital requirements. The effect of this is that these powers could only be used in respect of small and medium-sized banks, and those on the MREL glide path. It is unclear whether the government will reverse this amendment in the House of Commons.

HMT will update the Code of Practice that supports the special resolution regime to reflect the use of the new recapitalisation mechanism introduced by the Bill. A draft of the revised Code was published in October 2024 and the final version will be issued when the Bill is passed and comes into force.

Similarly, the PRA will consult on changes to the Depositor Protection Part of its Rulebook to implement the new mechanism.

Resolvability assessments

In 2024, the Bank of England published its second assessment of the eight major U.K. banks under the Resolvability Assessment Framework (RAF). The assessment found that the major U.K. banks have continued to make progress in improving their preparations for resolution, including embedding resolution preparations into their everyday business, and in addressing issues outstanding from the first assessment in 2022.

This second assessment focussed on having adequate financial resources in the context of resolution, one of the three outcomes major U.K. banks need to achieve to be considered resolvable. The next RAF assessment will focus on the continuity and restructuring outcome, including an assessment of the readiness of the major U.K. banks to quickly plan for and execute restructuring options to address the causes of failure and restore viability.

Considering the progress made to date on resolvability and to give the Bank of England and the major U.K. banks time to further enhance and progress testing of their resolution capabilities ahead of the next assessment, the PRA has proposed rule changes to postpone the third RAF assessment by one year, to 2026-27 rather than 2025-26. The PRA is also proposing to amend its rules so that the timing of future submissions and disclosures would no longer be fixed to two-year cycles. Firms would continue to be subject to reporting and disclosure obligations on their resolvability but on a periodic basis. The PRA's expectations on firms as to the reporting and disclosure dates would be communicated in advance of each cycle, taking account of the need to provide time for firms to plan and prepare their reports. The PRA proposes that the changes would come into effect on publication of the final policy, envisaged for Q1 2025.

Solvent wind-down and solvent exit expectations

In May 2022, the PRA finalised its expectations of certain firms in relation to the full or partial orderly wind-down of trading activities in recovery and post-resolution restructuring. Systemically important banks that have the full or partial wind-down of their trading activities as a recovery and post-resolution restructuring option are expected to address specific trading wind-down issues as part of their recovery planning. Firms are expected to meet the expectations by 3 March 2025.

The PRA also finalised a new framework governing solvent exit planning for non-systemic banks and building societies in 2024 and firms are preparing for implementation by 1 October 2025. Firms are required to prepare for a solvent exit and produce a document setting out their preparations.

EU

Recovery and resolution is one of five areas identified by the EBA's Advisory Committee on Proportionality (ACP) suitable for enhanced proportionality. In its 2025 work plan, the EBA includes anticipated activities and deliverables in the area of recovery and resolution.

The EBA will maintain its focus on whether any elements of secondary legislation need review. Consideration will also be given to earlier recommendations of the ACP on proportionality, in particular related to the resolvability assessment process and the update of resolution plans. It will maintain its focus on cooperation between supervisory and resolution authorities, with due consideration of proportionality, as suggested by the ACP, related to the update, review and standardisation of the resolution planning.

Crisis preparedness

In the context of crisis preparedness, the EBA will continue to monitor evolving practices in relation to recovery planning, focusing in particular on improving the usability of recovery plans through appropriate testing and the interaction with the supervisory review and evaluation process (SREP).

The EBA will continue to monitor convergence through the EREP (European Resolution Examination Program). Key 2025 EREP topics are the operationalisation of resolution strategies, the management information system for valuation and the operationalisation of liquidity strategies in resolution. New elements introduced for 2025 reflect policy and market developments, progress and expertise gained by resolution authorities, and embed a testing dimension which is considered central for resolution readiness. Building up own funds and eligible liabilities is not a separate priority anymore, given that most banks have met their MREL targets. However, to increase the effectiveness of the bail-in tool, MREL qualitative aspects are to be further monitored as part of the operationalisation of resolution tools, and quantitative aspects will be followed and disclosed by the EBA in its MREL Dashboard.

The SRB's 2025 annual work programme includes streamlining the resolution planning process and resolution plans to make them more efficient and better focused on the most important issues.
With a focus on resolvability, the SRB will continue to develop operational guidance for bank-led stress tests and develop comprehensive multi-annual testing programmes spanning from 2026 to 2028 and to be complemented by deep dives and on-site inspections.

2025 may see follow-up actions arising out of institutions' first self-assessment reports, the deadline for which was 31 December 2024. Crisis communication also continues to be a focus and the SRB, together with national resolution authorities, will further develop its strategy, plans and cooperation in this area.

In November 2024, the SRB published its minimum bail-in data template documentation package. On the basis of the minimum bail-in data template (MBDT) guidance, approximately 10-15 banks have been requested to take part in pilot exercises to test the MBDT in 2025. These banks have been notified via priority letters.

From 17 January 2025, the new requirements stemming from Regulation 2022/2554 as regards digital operational resilience for the financial sector (DORA) will apply (see the Outsourcing and operational resilience section for more information), including a number of changes to the BRRD. Institutions under the SRB's remit may be requested to submit to the SRB the results of the digital operational resilience testing done in accordance with DORA, in order to allow for the assessment required under point 4a Section C of the Annex to the BRRD (as amended by DORA).

Crisis management and deposit insurance

Development of the crisis management and deposit insurance framework is regaining momentum. In April 2023, the Commission adopted proposals for amendments to the BRRD, Directive 2014/49 on deposit guarantee schemes (DGSD) and Regulation 806/2014 (SRM Regulation) resulting from its review of the EU bank crisis management and deposit insurance framework, with a focus on medium sized and smaller banks.

The package seeks to revise the powers of competent authorities to intervene in the affairs of banks that are in financial difficulties but that are not yet failing or likely to fail (FOLTF) and the application of the public interest assessment (PIA) as part of the process for determining whether to trigger resolution. It contains new provisions on the conditions for the use of public funds in the form of extraordinary public support and measures intended to promote the use of deposit guarantee schemes (DGSs) in resolutions.

There are proposed revisions to the hierarchy of claims in insolvency, to introduce a general depositor preference with a single-tiered ranking and revisions to the scope of DGS protection. The Commission does not intend to adjust the current coverage level of EUR100,000 per depositor per bank but there are provisions to harmonise the protection of temporary high balances.

The proposals seek to revise MREL provisions concerning issues including the use of subordinated eligible instruments, calibrating MREL for transfer strategies leading to a bank's market exit, and the power to prohibit certain distributions.

The Council and the European Parliament have each agreed their respective negotiating positions and the file entered trilogues in December 2024 which continue into 2025.

The EBA expects further calls for advice or opinions in 2025 and is set to be mandated to prepare certain standards under the legislation, potentially from Q4 2025.

CCP recovery and resolution

As the systemic importance of central counterparties (CCPs) has and continues to increase in the wake of the post-crisis reforms, the importance of effective regimes for the recovery and resolution of such financial market infrastructure has been amongst the priorities of the reform agenda for some years now.

U.K.

In the U.K., the Bank of England's existing resolution powers for CCPs have been enhanced by FSMA 2023. Throughout 2024, the Bank of England developed its policy relating to its powers under and operation of this enhanced regime. The Bank of England also intends to publish a document setting out its approach to CCP resolution in "due course”. HMT is also still expected to make a set of regulations covering compensation and valuation under the regime.

EU

Regulation 2021/23 on a framework for the recovery and resolution of central counterparties was published in the EU's Official Journal in January 2021. The regulation requires ESMA to submit a report to the Commission on the publication of administrative penalties and other administrative measures by Member States on an anonymous basis and whether there have been significant divergences between Member States in that respect. That report shall also address any significant divergences in the duration of publication of administrative penalties or other administrative measures under national law of Member States. The deadline for that report was initially 12 August 2022 but it was delayed to 2025 due to a “very limited volume of penalties and conflicting priorities”.    

Operational resilience and outsourcing

International

Noting that cyber and operational resilience risks continue to pose a threat to financial stability, the FSB has proposed a common Format for Incident Reporting Exchange (FIRE). FIRE is designed to enhance convergence in incident reporting, address operational challenges arising from reporting to multiple authorities and foster better communication amongst authorities. The final version of FIRE is expected by Q2 2025.

U.K.

Operational resilience remains a priority for the U.K. regulators. Firms will have identified their important business services, set impact tolerances and identified vulnerabilities under the framework published by the FCA and PRA in March 2021. By the end of the transitional period on 31 March 2025, firms should be capable of showing that they are able to remain within their impact tolerance(s) for each important business service in the event of a severe but plausible disruption. The PRA expects firms to have a clear plan to identify and remediate any vulnerabilities which could impact their ability to deliver their important business services.

The PRA and FCA are now consulting on a new way for firms to report operational incidents, proposing to introduce rules to clarify what constitutes an 'operational incident', when to report and standard templates. In addition, the regulators are proposing to expand the scope of existing obligations to report on material outsourcing to also encompass material
non-outsourcing arrangements. It is proposed that firms be required to maintain a register of all material third-party arrangements.
 
Non-outsourcing arrangements would include the purchase of data, hardware, software and other ICT products and would include intra-group arrangements. The regulators plan to publish final rules in H2 2025. The implementation date for the proposals will be no earlier than H2 2026. Further detail on the proposals can be found in our client bulletin, here. See the Financial Markets - Operational Resilience section below for details of the Bank of England's related proposals. These proposals echo the intended outcomes of some of the EU's Digital Operational Resilience Act (DORA).

The collection of the data under the above proposals would also assist the regulators to understand firm-specific and systemic risks posed by third-party providers and help the regulators to identify critical third parties (CTPs) for potential designation under the new CTP regime. See our blog for details of the regulators CTP rules. The PRA and FCA rules on CTPs took effect on 1 January 2025, although will only apply to individual CTPs from the date their HMT CTP designations come into force. HMT has not yet made any such CTP designations. See our blog for details of HMT's approach to designations.

EU

DORA, and the related guidance and technical standards, has applied since 17 January 2025. DORA implementation was a major focus for EU financial entities over 2024, impacting their suppliers and counterparties as changes to ICT supply arrangements were implemented. 

In 2025, regulated firms will be focussing on ongoing implementation of the DORA requirements, including undertaking gap analysis and monitoring of new ICT service providers.

Financial entities need to have their registers of ICT third-party providers' contractual arrangements available for national competent authorities (NCAs) early in 2025, as the latter must report the registers to the ESAs by 30 April 2025. NCAs must submit to the ESAs by the end of March, the list of financial entities, excluding credit institutions, that are considered to be systemic. The first designation of critical third-party service providers is expected to take place in H2 2025.

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