Prudential Regulation Authority Rulebook

6.1

The PRA expects a firm that is seeking to apply the Standardised Approach on a permanent basis to certain exposures to have a well-documented policy, explaining the basis on which exposures would be selected for permanent exemption from the IRB approach. This policy should be provided to the PRA when the firm applies for permission to use the IRB approach and maintained thereafter. Where a firm also wishes to undertake sequential implementation, the PRA expects the firm’s roll-out plan to provide for the continuing application of that policy on a consistent basis over time.

(CRR Article 143(1), 148(1) and CRR Article 150(1))

6.2

The PRA may permit the exemption of exposures to sovereigns and institutions under CRR Articles 150(1)(a) and 150(1)(b) respectively, only if the number of material counterparties is limited and it would be unduly burdensome to implement a rating system for such counterparties.

6.3

The PRA considers that the ‘limited number of material counterparties’ test is unlikely to be met if for the UK group total exposures to ‘higher-risk’ sovereigns and institutions exceed either £1 billion or 5% of total assets (other than in the case of temporary fluctuations above these levels). For these purposes, ‘higher-risk’ sovereigns and institutions are considered to be those that are unrated or carry ratings of BBB+ (or equivalent) or lower. In determining whether to grant this exemption, the PRA will also consider whether a firm incurs exposures to ‘higher-risk’ counterparties which are below the levels set out below, but are outside the scope of its core activities.

6.4

In respect of the ‘unduly burdensome’ condition, the PRA considers that an adequate, but not perfect, proxy for the likely level of expertise available to a firm is whether its group has a trading book. Accordingly, if a firm’s group does not have a trading book, the PRA is likely to accept the argument that it would be unduly burdensome to implement a rating system.

(CRR Article 150(1)(a) and 150(1)(b))

6.5

Where a firm wishes permanently to apply the standardised approach to certain business units on the grounds that they are non-significant, and/or certain exposure classes or types of exposures on the grounds that they are immaterial in terms of size and perceived risk profile, the PRA expects to permit this exemption only to the extent that the relevant risk-weighted exposure amounts calculated under paragraphs (a) and (f) of CRR Article 92(3) that are based on the standardised approach (insofar as they are attributable to the exposures to which the standardised approach is permanently applied) – would be no more than 15% of the risk-weighted exposure amounts calculated under paragraphs (a) and (f) of CRR Article 92, based on whichever of the standardised approach and the IRB approach would apply to the exposures at the time the calculation was made.

6.6

The following points set out the level at which the PRA would expect the 15% test to be applied for firms that are members of a group:

1. (a) if a firm were part of a group subject to consolidated supervision in the UK and for which the PRA was the lead regulator, the calculations in part (a) would be carried out with respect to the wider group;
2. (b) if a firm were part of a group subject to consolidated supervision in the UK and for which the PRA was not the lead regulator the calculation set out in part (a) would not apply but the requirements of the lead regulator related to materiality would need to be met in respect of the wider group;
3. (c) if the firm were part of a subgroup subject to consolidated supervision in the UK, and part of a wider non-UK group subject to equivalent supervision by a regulatory authority outside of the UK, the calculation set out in part (a) would not apply but the requirements of the lead regulator related to materiality would need to be met in respect of both the subgroup and the wider group; and
4. (d) if the firm is part of a subgroup subject to consolidated supervision in the UK, and is part of a wider non-UK group that is not subject to equivalent supervision by a regulatory authority outside of the EEA, then the calculation in part (a) would apply in respect of the wider group if supervision by analogy (as referred to in CRR) is applied and in respect of the subgroup if other alternative supervisory techniques are applied.

6.7

Whether a non-UK group is subject to equivalent supervision, whether it is subject to supervision by analogy, as referred to in the CRR, or whether other alternative supervisory techniques apply, is decided in accordance with Regulation 21 of The Capital Requirements Regulations 2013 (as amended by The Capital Requirements (Amendment) (EU Exit) Regulations 2018).

(CRR Article 150(1)(c))

6.8

Where a firm wished permanently to apply the standardised approach to exposures to connected counterparties in accordance with CRR Article 150(1)(e), the PRA will normally grant permission to do so only if the firm has a policy that identifies connected counterparty exposures that would be permanently exempted from the IRB approach and also identifies connected counterparty exposures (if any) that would not be permanently exempted. The PRA expects a firm to use the IRB approach either for all of its intra-group exposures or for none of them.

(CRR Article 150(1)(e))