Basel Framework Overview

See also

• The Basel Framework, the consolidated standards on the Bank for International Settlements website

• Basel III: international regulatory framework for banks

• Minimum capital requirements for market risk (FRTB)

• PRA: implementation of the Basel 3.1 standards

• PRA Rulebook

The Basel framework is the set of international standards for the regulation of banks. It is published by the Basel Committee on Banking Supervision (BCBS), which is hosted by the Bank for International Settlements. The Committee has no legal powers. Its standards only become binding when national authorities turn them into law or rules, which is why the same standard looks different in the UK, the EU and the US.

The three pillars

The three pillars of Basel

Pillar	Purpose	What it covers
Pillar 1	Minimum capital requirements	Standard formulas for credit risk, market risk, operational risk and credit valuation adjustment (CVA) risk, plus the leverage ratio and the liquidity ratios.
Pillar 2	Supervisory review	Risks that Pillar 1 does not capture, or captures poorly. The bank assesses its own needs in the ICAAP, and the supervisor sets additional requirements (Pillar 2A) and a buffer for stress (the PRA buffer).
Pillar 3	Market discipline	Public disclosure of capital, risk exposures and risk management, so that investors and counterparties can compare banks.

How the framework developed

• Basel I (1988): a simple capital ratio against credit risk, with a few broad risk weight buckets.

• Basel II (2004): risk weights based on the bank’s own models or on external ratings, and the introduction of the three pillars and operational risk.

• Basel 2.5 (2009): a quick response to the crisis, adding stressed VaR, the incremental risk charge and higher charges for securitisations in the trading book.

• Basel III (2010 and 2011): more and better quality capital, a leverage ratio, buffers, two liquidity ratios, and a charge for CVA risk and for counterparty credit risk.

• Basel III finalisation (2017): reduced reliance on internal models, an output floor, and a revised standardised approach for credit risk. It is called Basel 3.1 in the UK, CRR3 and CRD VI in the EU, and the Basel III endgame in the US.

• FRTB (2016, revised 2019): a new framework for market risk, with expected shortfall in place of VaR.

Who regulates what

Authorities in the UK, the EU and the US

Area	UK	EU	US
Prudential rules (capital, liquidity)	Prudential Regulation Authority (PRA), part of the Bank of England.	European Banking Authority (EBA) writes the technical rules. The ECB supervises the largest banks through the Single Supervisory Mechanism.	Federal Reserve, Office of the Comptroller of the Currency (OCC) and the FDIC.
Conduct and markets	Financial Conduct Authority (FCA).	ESMA and national authorities.	SEC and CFTC.
Macroprudential	Financial Policy Committee (FPC).	European Systemic Risk Board.	Financial Stability Oversight Council.
Main legislation	Retained CRR, being replaced by the PRA Rulebook, and the Financial Services and Markets Act 2023.	CRR3 and CRD VI.	Dodd-Frank Act and the agencies’ own rules.

After Brexit, the UK took the EU rules into UK law, and since then has been replacing the legislation with PRA rules so that the regulator can change them more easily. The result is that UK and EU rules started out the same but are drifting apart. UK banks also sit alongside the UK ring-fencing rules, which separate retail banking from investment banking for the largest groups.

The reforms in one table

This series covers the parts of the framework that bear on valuation. The rest are shown for context, and are not covered here.

What Basel III changed, and where it is covered

Reform	Idea	Page
Higher quality capital, and deductions from it	More common equity, with deductions for items such as valuation uncertainty and own credit.	Regulatory Capital: Where Valuation Reaches CET1
Prudent valuation	Capital deduction for valuation uncertainty.	Prudent Valuation
Margin rules	Mandatory margin for non-cleared derivatives, and clearing.	Margin and Clearing: Collateral and Valuation
Leverage ratio, buffers and the output floor	Limits on size and on the benefit of internal models.	Not covered
FRTB	A new market risk framework with an expected shortfall measure.	Not covered
SA-CCR and the CVA capital charge	Better measures of counterparty credit risk and of its mark-to-market volatility.	Not covered
Liquidity coverage and net stable funding ratios	Hold enough liquid assets for 30 days of stress, and stable funding over one year.	Not covered

Timing of the Basel 3.1 and FRTB reforms

The reforms have been postponed more than once in the UK, the EU and the US, mainly because the jurisdictions have wanted to avoid being first, or to adjust the rules for their own banks. At the time of writing the UK date for Basel 3.1, including the market risk reforms, is 1 January 2027, with the output floor phased in over the following years. Check the latest PRA policy statements for the current position.

A valuation control view

Valuation control sits in the middle of this framework, since many of the rules turn on the value of a position or on the observability of its inputs:

• Capital starts from the accounting balance sheet, so the fair value that valuation control signs off flows into the regulatory capital base. See IFRS 13: Fair Value Measurement.

• The prudent valuation deduction from capital is a direct charge for valuation uncertainty. See Prudent Valuation.

• The margin and collateral terms that drive the exposure also drive the discounting and the valuation of derivatives. See Margin and Clearing: Collateral and Valuation.

• Regulators expect the data, models and controls behind these numbers to be governed. See Governance: Model Risk, Accountability and Data, and Sarbanes-Oxley: Internal Controls over Financial Reporting for the controls over financial reporting.