BIPRU Prudential sourcebook for Banks, Building Societies and Investment Firms

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BIPRU 1

Application

BIPRU 1.1

Application

  • 01/01/2007

BIPRU 1.1.1

handbook-guidance

There is no overall application statement for BIPRU. Each chapter or section has its own application statement. Broadly speaking however, BIPRU applies to:

  1. (1) a bank;
  2. (2) a building society;
  3. (3) a BIPRU investment firm; and
  4. (4) groups containing such firms.

BIPRU 1.1.2

handbook-rule
BIPRU applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.

BIPRU 1.1.3

handbook-guidance
In the main BIPRU only applies to a UCITS investment firm in respect of designated investment business (excluding scheme management activity). However BIPRU 2.2 (Internal capital adequacy standards), BIPRU 2.3 (Interest rate risk in the non-trading book), BIPRU 8 (Group risk - consolidation) and BIPRU 11 (Disclosure) apply to the whole of its business.

Purpose

BIPRU 1.1.4

handbook-guidance
BIPRU 1.1 implements in part Articles 3(1)(b), 5, 9, 10 and 20 of the Capital Adequacy Directive.

Guidance on the categorisation of BIPRU investment firms

BIPRU 1.1.5

handbook-guidance
Guidance on the categorisation of investment firms for the purposes of BIPRU and GENPRU is included in PERG 13 (Guidance on the scope of the Markets in Financial Instruments Directive and the recast Capital Adequacy Directive).

The definition of a BIPRU firm

BIPRU 1.1.6

handbook-rule

Subject to BIPRU 1.1.7 R, a BIPRU firm means a firm that is:[deleted]

  1. (1) a building society; or
  2. (2) a bank; or
  3. (3) a full scope BIPRU investment firm; or
  4. (4) a BIPRU limited licence firm; or
  5. (5) a BIPRU limited activity firm.

BIPRU 1.1.7

handbook-rule

None of the following is a BIPRU firm and each of the following is excluded from each of the categories of BIPRU investment firm listed in BIPRU 1.1.6 R (3) to BIPRU 1.1.6R (5) and BIPRU 1.1.18 R (2) to (4):

  1. (1) an incoming EEA firm;
  2. (2) an incoming Treaty firm;
  3. (3) any other overseas firm;
  4. (4) an ELMI;
  5. (5) an insurer; and
  6. (6) an ICVC.

BIPRU 1.1.8

handbook-rule

BIPRU 1.1.9

handbook-guidance
EEA firms are subject to the prudential standards of their home state regulator. But the Banking Consolidation Directive permits a host state competent authority to require a BCD credit institution to meet certain standards relating to its liquidity. The FSA's approach to liquidity for such firms is set out in BIPRU 12.

BIPRU 1.1.10

handbook-guidance
  1. (1) This paragraph applies to an undertaking that would be a third country BIPRU firm if it were authorised under the Act.
  2. (2) Except in exceptional circumstances, it is the FSA's policy that it will not give an overseas applicant a Part IV permission unless the FSA is satisfied that the applicant will be subject to prudential regulation by its home state regulatory body that is broadly equivalent to that provided for in the Handbook and the applicable EEA prudential sectoral legislation. The FSA will take into account not only the requirements to which the firm is subject but how they are enforced. The FSA will also take into account the laws, regulations and administrative provisions to which it is subject in its home state. The reasons for that policy include:
    1. (a) it is unlikely that a firm that is not subject to equivalent supervision will be able to satisfy the threshold conditions (and in particular threshold condition 5 (Suitability)) and it is unlikely that it will be possible to establish that the firm does satisfy them;
    2. (b) such a firm is likely to pose a threat to the interests of consumers and potential consumers, particularly as effective supervision of an overseas firm depends on cooperation between the FSA and the regulatory body that authorises the firm in its home country and on the FSA being able to place appropriate reliance on the supervision carried out by such regulatory body; and
    3. (c) under Article 38(1) of the Banking Consolidation Directive the FSA should not apply to branches of credit institutions having their head office outside the EEA, when commencing or carrying on their business, provisions which result in more favourable treatment than that accorded to branches of credit institutions having their head office in the EEA.
  3. (3) If an undertaking is not subject to equivalent supervision in its home state and it wishes to carry on in the United Kingdom regulated activities coming within the scope of the activities that define a BIPRU firm it should establish a subsidiary undertaking in the United Kingdom. Such a subsidiary undertaking should be able to show, amongst other things, how it would comply with the threshold conditions (and in particular threshold conditions 3 (Close links) and 5 (Suitability)).
  4. (4) If in exceptional circumstances the FSA does grant a Part IV permission to an undertaking that is not subject to equivalent prudential regulation the FSA is likely to take measures under the regulatory system to compensate for the lack of equivalent supervision. These may include applying the prudential requirements for BIPRU firms to the firm.
  5. (5) An overseas firm that is subject to equivalent supervision is subject to the threshold conditions and the Principles. BIPRU and GENPRU do not generally apply. However BIPRU 12 applies to a credit institution with respect to liquidity risk in relation to its United Kingdom branch.

Types of investment firm: Limited activity firms

BIPRU 1.1.11

handbook-rule

A limited activity firm means (as specified by Article 20(3) of the Capital Adequacy Directive (Exemptions from operational risk)) a CAD investment firm that satisfies the following conditions:

  1. (1) it meets the criteria in (a) or the criteria in (b):
    1. (a) it deals on own account only:
      1. (i) for the purpose of fulfilling or executing a client order; or
      2. (ii) for the purpose of gaining entrance to a clearing and settlement system or a recognised investment exchange or designated investment exchange when acting in an agency capacity or executing a client order; or
    2. (b) it satisfies the following conditions:
      1. (i) it does not hold client money or securities in relation to investment services that it provides and is not authorised to do so;
      2. (ii) the only investment service it undertakes is dealing on own account;
      3. (iii) it has no external customers in relation to investment services it provides; and
      4. (iv) the execution and settlement of its transactions in relation to investment services it provides takes place under the responsibility of a clearing institution and are guaranteed by that clearing institution;
  2. (2) (in the case of a CAD investment firm that is a BIPRU investment firm) its base capital resources requirement is €730,000;
  3. (3) (in the case of a CAD investment firm that is an EEA firm) it is subject to the CRD implementation measures of its Home State for Article 9 of the Capital Adequacy Directive (Initial capital requirement of €730,000); and
  4. (4) (in the case of any other CAD investment firm) its base capital resources requirement would be €730,000 if it had been a BIPRU investment firm on the basis of the assumptions in BIPRU 1.1.14 R (3)(a) and BIPRU 1.1.14 R (3)(b).

Types of investment firm: Limited licence firms

BIPRU 1.1.12

handbook-rule

A limited licence firm means (as specified by Article 20(2) of the Capital Adequacy Directive (Exemptions from operational risk)) a CAD investment firm that is not authorised to:

  1. (1) deal on own account; or
  2. (2) provide the investment services of underwriting or placing financial instruments (as referred to in point 6 of Section A of Annex I of MiFID) on a firm commitment basis.

Types of investment firm: CAD full scope firm

BIPRU 1.1.13

handbook-rule

Types of investment firm: CAD investment firm

BIPRU 1.1.14

handbook-rule
  1. (1) In accordance with Article 3(1)(b) of the Capital Adequacy Directive, a person is a CAD investment firm if it falls into (2) or (3).
  2. (2) A person whose head office is in an EEA State is a CAD investment firm if it is an investment firm that is subject to the requirements imposed by MiFID but excludes the following:
    1. (a) a bank, a building society or an ELMI;
    2. (b) a credit institution;
    3. (c) a local; and
    4. (d) an exempt CAD firm.
  3. (3) An investment firm whose head office is not in an EEA State is a CAD investment firm if it would have fallen into (2) if:
    1. (a) its head office had been in an EEA State; and
    2. (b) it had carried on all its business in the EEA and had obtained whatever authorisations for doing so are required under MiFID.

BIPRU 1.1.15

handbook-guidance

The following are excluded from the definition of a CAD investment firm and hence from the definition of BIPRU investment firm:

  1. (1) an investment firm to which MiFID does not apply under Article 2(1); and
  2. (2) an investment firm with the benefit of an exemption pursuant to Article 3 of MiFID.

Types of investment firm: Exempt CAD firm

BIPRU 1.1.16

handbook-rule

In accordance with Article 3(1)(b)(iii) of the Capital Adequacy Directive (Definitions), an exempt CAD firm means an investment firm that satisfies the following conditions:

  1. (1) it would have been a CAD investment firm if exempt CAD firms were not excluded from the definition; and
  2. (2) it is only authorised to provide the service of investment advice and/or receive and transmit orders from investors (as referred to in Section A of Annex I of MiFID) without in both cases holding money or securities belonging to its clients and which for that reason may not at any time place itself in debit with its clients.

Types of BIPRU investment firm

BIPRU 1.1.17

handbook-rule
  1. (1) A BIPRU limited licence firm means a limited licence firm that falls into (4).
  2. (2) A BIPRU limited activity firm means a limited activity firm that falls into (4).
  3. (3) A full scope BIPRU investment firm means a CAD full scope firm that falls into (4).
  4. (4) A limited licence firm, limited activity firm or CAD full scope firm falls into (4) if:
    1. (a) it is a firm; and
    2. (b) its head office is in the United Kingdom and it is not otherwise excluded from the definition of BIPRU firm under BIPRU 1.1.7 R.

Alternative classification of BIPRU investment firms

BIPRU 1.1.18

handbook-rule

BIPRU investment firm are divided into the following classes for the purposes of the calculation of the base capital resources requirement and for the purpose of any other provision of the Handbook that applies this classification:

  1. (1) a UCITS investment firm;
  2. (2) a BIPRU 50K firm;
  3. (3) a BIPRU 125K firm; and
  4. (4) a BIPRU 730K firm.

Types of investment firm: BIPRU 125K firm

BIPRU 1.1.19

handbook-rule

A BIPRU 125K firm means a BIPRU investment firm that satisfies the following conditions:

  1. (1) it does not:
    1. (a) deal on own account; or
    2. (b) underwrite issues of financial instruments (as referred in Section A of Annex I of MiFID) on a firm commitment basis;
  2. (2) it holds clients' money or securities in relation to investment services it provides or is authorised to do so;
  3. (3) it offers one or more of the following services (all as referred to in Section A of Annex I of MiFID):
    1. (a) reception and transmission of investors' orders for financial instruments; or
    2. (b) the execution of investors' orders for financial instruments; or
    3. (c) the management of individual portfolios of investments in financial instruments;
  4. (4) it is not a UCITS investment firm and;
  5. (5) it does not operate a multilateral trading facility.

Types of investment firm: BIPRU 50K firm

BIPRU 1.1.20

handbook-rule

A BIPRU 50K firm means a BIPRU investment firm that satisfies the following conditions:

  1. (1) it satisfies the conditions in BIPRU 1.1.19 R (1) and (3);
  2. (2) it does not hold clients' money or securities in relation to investment services it provides and it is not authorised to do so;
  3. (3) it is not a UCITS investment firm; and
  4. (4) it does not operate a multilateral trading facility.

Types of investment firm: 730K firm

BIPRU 1.1.21

handbook-rule

Types of investment firm: Part IV permission

BIPRU 1.1.22

handbook-rule
A firm also falls into one of the categories of BIPRU investment firm listed in BIPRU 1.1.6 R (3)to (5) or BIPRU 1.1.18 R if its Part IV permission contains a requirement that it comply with the rules in GENPRU and BIPRU applicable to that category of firm. If a firm is subject to such a requirement and it would otherwise also fall into another category of BIPRU investment firm it does not fall into that other category.

Meaning of dealing on own account

BIPRU 1.1.23

handbook-rule
  1. (1) Dealing on own account means (for the purpose of GENPRU and BIPRU) the service of dealing in any financial instruments for own account as referred to in point 3 of Section A of Annex I to MiFID, subject to (2) and (3).
  2. (2) In accordance with article5(2) of the Capital Adequacy Directive (Definition of dealing on own account), a CAD investment firm that executes investors' orders for financial instruments and holds such financial instruments for its own account does not for that reason deal on own account if the following conditions are met:
    1. (a) such position only arise as a result of the CAD investment firm's failure to match investors' orders precisely;
    2. (b) the total market value of all such positions is no higher than 15% of the CAD investment firm's initial capital;
    3. (c) (in the case of a BIPRU investment firm) it complies with the main BIPRU firm Pillar 1 rules and BIPRU 10 (Large exposures requirements);
    4. (d) (in the case of a CAD investment firm that is an EEA firm) it complies with the CRD implementation measures of its Home State for Articles 18 and 20 (Minimum capital requirements) and 28 (Large exposures) of the Capital Adequacy Directive;
    5. (e) (in the case of any other CAD investment firm) it would comply with the rules in (2)(c) if it had been a BIPRU investment firm on the basis of the assumptions in BIPRU 1.1.14 R (3)(a) and BIPRU 1.1.14R (3)(b); and
    6. (f) such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.
  3. (3) In accordance with Article 5(2) of the Capital Adequacy Directive, the holding of non-trading book positions in financial instruments in order to invest capital resources is not dealing on own account for the purposes referred to in BIPRU 1.1.18 R.

Interpretation of the definition of types of firm and undertaking

BIPRU 1.1.24

handbook-rule

For the purposes of the definitions in BIPRU 1.1, a person does any of the activities referred to in BIPRU 1.1 if:

  1. (1) it does that activity anywhere in the world; or
  2. (2) if its permission includes that activity; or
  3. (3) (in the case of an EEA firm) it is authorised by its Home State regulator to do that activity; or
  4. (4) (if the carrying on of that activity is prohibited in a state or territory without an authorisation in that state or territory) that firm has such an authorisation.

BIPRU 1.1.25

handbook-rule

For the purposes of the definitions in BIPRU 1.1, a person offers any of the services referred to in BIPRU 1.1.19 R (3) if:

  1. (1) it offers that service anywhere in the world; or
  2. (2) any of BIPRU 1.1.24 R (1) to BIPRU 1.1.24R (4) apply.

BIPRU 1.1.26

handbook-rule
For the purposes of the definitions in BIPRU 1.1, a person has an authorisation to do any of the activities referred to in BIPRU 1.1 if any of BIPRU 1.1.24 R (2) to (4) apply.

BIPRU 1.2

Definition of the trading book

  • 01/01/2007

Application

BIPRU 1.2.1

handbook-rule
This section applies to a BIPRU firm.

Purpose

BIPRU 1.2.2

handbook-guidance
This section implements certain provisions of the Capital Adequacy Directive and the Banking Consolidation Directive relating to the trading book. The precise provisions being implemented are listed as a note after each rule.

Definition of the trading book: General

BIPRU 1.2.3

handbook-rule

The trading book of a firm consists of all position in CRD financial instrument and commodities held either with trading intent or in order to hedge other elements of the trading book and which are either free of any restrictive covenants on their tradability or able to be hedged.

[Note: CAD Article 11(1)]

Definition of the trading book: Positions

BIPRU 1.2.4

handbook-rule

The term position includes proprietary positions and positions arising from client servicing and market making.

BIPRU 1.2.5

handbook-guidance
Positions arising from client servicing include those arising out of contracts where a firm acts as principal (even in the context of activity described as 'broking' or 'customer business'). Such positions should be allocated to a firm's trading book if the intent is trading (see BIPRU 1.2.10 R). This applies even if the nature of the business means that generally the only risks incurred by the firm are counterparty risks (i.e. no market risk charges apply). If the nature of the business means that generally the only risks incurred by the firm are counterparty risks, the position will generally still meet the trading intent requirement in BIPRU 1.2.10 R if the position would meet the trading intent requirement if position risk did arise. The FSA understands that business carried out under International Uniform Brokerage Execution ("Give-Up") Agreements involve back to back trades as principal. Thus positions arising out of business carried out under such agreements should be allocated to a firm's trading book.

Definition of the trading book: Repos

BIPRU 1.2.6

handbook-rule
Term trading-related repo-style transactions that a firm accounts for in its non-trading book may be included in the trading book for capital requirement purposes so long as all such repo-style transactions are included. For this purpose, trading-related repo-style transactions are defined as those that meet the requirements of BIPRU 1.2.4 R, BIPRU 1.2.10 R and BIPRU 1.2.12 R, and both legs are in the form of either cash or securities includable in the trading book. Regardless of where they are booked, all repo-style transactions are subject to a non-trading book counterparty credit risk charge.
[Note: CAD Annex VII Part D point 4]

BIPRU 1.2.6A

handbook-guidance
Capital requirements for term trading-related repo-style transactions are the same whether the risks arise in the trading book as counterparty credit risk or in the non-trading book as credit risk.

CRD financial instruments

BIPRU 1.2.7

handbook-rule

A CRD financial instrument means any contract that gives rise to both a financial asset of one party and a financial liability or equity instrument of another party.

BIPRU 1.2.8

handbook-rule

CRD financial instruments include both primary CRD financial instrument or cash instruments, and derivative CRD financial instruments the value of which is derived from the price of an underlying CRD financial instrument, a rate, an index or the price of another underlying item and include as a minimum the instruments specified in Section C of Annex I to the MIFID.

[Note: CAD Article 3(1) last paragraph]

BIPRU 1.2.9

handbook-guidance

Generally, for the purpose of the definition of CRD financial instrument:

  1. (1) a financial asset means cash, the right to receive cash or another financial asset, the contractual right to exchange financial assets on potentially favourable terms or an equity instrument; and
  2. (2) a financial liability means the contractual obligation to deliver cash or another financial asset or to exchange financial liabilities under conditions that are potentially unfavourable.

Trading intent

BIPRU 1.2.10

handbook-rule

Positions held with trading intent for the purpose of the definition of the trading book are those held intentionally for short-term resale and/or with the intention of benefiting from actual or expected short-term price differences between buying and selling prices, or from other price or interest rate variations.

BIPRU 1.2.11

handbook-rule

Trading intent must be evidenced on the basis of the strategies, policies and procedures set up by the firm to manage the position or portfolio in accordance with BIPRU 1.2.12 R.

BIPRU 1.2.12

handbook-rule

Positions/portfolios held with trading intent must comply with the following requirements:

  1. (1) there must be a clearly documented trading strategy for the position/instrument or portfolios, approved by senior management, which must include the expected holding horizon;
  2. (2) there must be clearly defined policies and procedures to monitor the position against the firm's trading strategy including the monitoring of turnover and stale position in the firm's trading book; and
  3. (3) there must be clearly defined policies and procedures for the active management of the position, which must include the following:
    1. (a) position entered into on a trading desk;
    2. (b) position limits are set and monitored for appropriateness;
    3. (c) dealers have the autonomy to enter into/manage the position within agreed limits and according to the approved strategy;
    4. (d) positions are reported to senior management as an integral part of the firm's risk management process; and
    5. (e) positions are actively monitored with reference to market information sources and an assessment made of the marketability or hedge-ability of the position or its component risks, including the assessment of, the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market.

[Note: CAD Annex VII Part A]

Internal hedges

BIPRU 1.2.13

handbook-rule

Internal hedges may be included in the trading book, in which case BIPRU 1.2.14 R to BIPRU 1.2.16 R apply.

[Note: CAD Article 11(5)]

BIPRU 1.2.14

handbook-rule
  1. (1) An internal hedge is a position that materially or completely offsets the component risk element of a non-trading book position or a set of position. Positions arising from internal hedges are eligible for trading book capital treatment, provided that they are held with trading intent and that the general criteria on trading intent and prudent valuation specified in BIPRU 1.2.12 R and the trading book systems and controls rules. In particular:
    1. (a) internal hedges must not be primarily intended to avoid or reduce capital requirements;
    2. (b) internal hedges must be properly documented and subject to particular internal approval and audit procedures;
    3. (c) the internal transaction must be dealt with at market conditions;
    4. (d) the bulk of the market risk that is generated by the internal hedge must be dynamically managed in the trading book within the authorised limits; and
    5. (e) internal transactions must be carefully monitored.
  2. (2) Monitoring must be ensured by adequate procedures.

[Note: CAD Annex VII Part C point 1]

BIPRU 1.2.15

handbook-rule

The treatment referred to in BIPRU 1.2.14 R applies without prejudice to the capital requirements applicable to the "non-trading book leg" of the internal hedge.

BIPRU 1.2.16

handbook-rule

By way of derogation from BIPRU 1.2.14 R to BIPRU 1.2.15 R, when a firm hedges a non-trading book credit risk exposure using a credit derivative booked in its trading book (using an internal hedge), the non-trading book exposure is not deemed to be hedged for the purposes of calculating capital requirements unless the firm purchases from an eligible third party protection provider a credit derivative meeting the requirements set out in BIPRU 5.7.13 R (Additional requirements for credit derivatives) with regard to the non-trading book exposure. Without prejudice to the second sentence of BIPRU 14.2.10 R, where such third party protection is purchased and is recognised as a hedge of a non-trading book exposure for the purposes of calculating capital requirements, neither the internal nor external credit derivative hedge must be included in the trading book for the purposes of calculating capital requirements.

Size thresholds

BIPRU 1.2.17

handbook-rule
  1. (1) Subject to (3), a firm may calculate its capital requirements for its trading book business in accordance with the standardised approach to credit risk (or, if it has an IRB permission, the IRB approach) as it applies to the non-trading book where the size of the trading book business meets the following requirements:
    1. (a) the trading book business of the firm does not normally exceed 5% of its total business;
    2. (b) its total trading book position do not normally exceed €15 million; and
    3. (c) the trading book business of the firm never exceeds 6% of its total business and its total trading book positions never exceed €20 million.
  2. (2) Subject to (3), if (1) applies, the following are disapplied:
    1. (a) the rules relating to the interest rate PRR, the equity PRR, the CIU PRR and the PRR calculated under BIPRU 7.11 (Credit derivatives in the trading book);
    2. (b) the rules relating to the option PRR (but only in relation to positions which under BIPRU 7.6.5 R (Table: Appropriate calculation for an option or warrant) may be subject to one of the other PRR charges listed in (2)(a) or which would be subject to such a PRR charge if BIPRU 7.6.5 R did not require an option PRR to be calculated);
    3. (c) BIPRU 7.10 (Use of a Value at Risk Model) so far as BIPRU 7.10 relates to the risks covered by the requirements in (a) and (b); and
    4. (d) BIPRU 14 (Capital requirements for settlement and counterparty risk).
  3. (3) If (1) applies, the following continue to apply:
    1. (a) the rules relating to the commodity PRR and the foreign currency PRR;
    2. (b) the rules relating to the option PRR (so far as not disapplied under (2)(b);
    3. (c) BIPRU 7.10 (so far as not disapplied under (2)(c));
    4. (d) BIPRU 14.2.3 R to BIPRU 14.2.8 R (Credit derivatives); and
    5. (e) BIPRU 14.2.15 R to BIPRU 14.2.16 R (Collateral for repurchase transactions and other products).

[Note: CAD Article 18(2)]

BIPRU 1.2.18

handbook-rule

In order to calculate the proportion that trading book business bears to total business for the purpose of BIPRU 1.2.17 R (1)(a) to BIPRU 1.2.17R (1)(c) the firm must refer to the size of the combined on- and off-balance-sheet business. For this purpose, debt instruments must be valued at their market prices or their principal values, equities at their market prices and derivatives according to the nominal or market values of the instruments underlying them. Long positions and short positions must be summed regardless of their signs.

[Note: CAD Article 18(3)]

BIPRU 1.2.19

handbook-rule

If a firm should happen for more than a short period to exceed either or both of the limits imposed in BIPRU 1.2.17 R (1)(a) and BIPRU 1.2.17R (1)(b) or either or both of the limits imposed in BIPRU 1.2.17 R (1)(c):

  1. (1) BIPRU 1.2.17 R ceases to apply; and
  2. (2) the firm must notify the FSA.

[Note: CAD Article 18(4)]

BIPRU 1.2.20

handbook-guidance
As required by BIPRU 8.7.21 R (Special rules for the consolidated market risk requirement), a firm should consider whether it meets the threshold conditions in BIPRU 1.2.17 R on both an unconsolidated (or solo) basis and a consolidated basis. If a firm's trading activities on both an unconsolidated (or solo) basis and a consolidated basis are below the threshold size, it may be appropriate for the firm not to adopt the trading book treatment. However, even if the firm does not apply the trading book treatment it should still adopt a trading book policy statement. That statement may be restricted to identifying the activities the firm normally considers to be trading and that would constitute part of its trading book. The firm should use this policy statement to help it to decide whether or not adopting the trading book treatment is appropriate.

Systems and controls for the trading book

BIPRU 1.2.21

handbook-rule

A firm must implement policies and processes for the measurement and management of all material sources and effects of market risks.

BIPRU 1.2.22

handbook-rule

A firm must establish and maintain systems and controls to manage its trading book, in accordance with the trading book systems and controls rules, BIPRU 1.2.6 R (Definition of the trading book: Repos) and the overall financial adequacy rule to BIPRU 1.2.27 R (Trading book policy statements).

BIPRU 1.2.23

handbook-rule

A firm must establish and maintain systems and controls sufficient to provide prudent and reliable valuation estimates.

BIPRU 1.2.24

handbook-rule

Systems and controls must include at least the following elements:

  1. (1) documented policies and procedures for the process of valuation (including clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month end and ad-hoc verification procedures); and
  2. (2) reporting lines for the department accountable for the valuation process that are clear and independent of the front office.

[Note: CAD Annex VII Part B point 2]

BIPRU 1.2.25

handbook-rule

The reporting line in relation to the matters covered by BIPRU 1.2.21 R to BIPRU 1.2.24 R must ultimately be to an executive director on the firm's governing body.

Trading book policy statements

BIPRU 1.2.26

handbook-rule

A firm must have clearly defined policies and procedures for determining which positions to include in the trading book for the purposes of calculating its capital requirements, consistent with the criteria set out in BIPRU 1.2.3 R to BIPRU 1.2.4 R, BIPRU 1.2.10 R to BIPRU 1.2.11 R, BIPRU 1.1.13 R and BIPRU 1.2.22 R and taking into account the firm's risk management capabilities and practices. Compliance with these policies and procedures must be fully documented and subject to periodic internal audit.

[Note: CAD Annex VII Part D point 1]

BIPRU 1.2.27

handbook-rule

A firm must have clearly defined policies and procedures for overall management of the trading book. At a minimum these policies and procedures must address:

  1. (1) the activities the firm considers to be trading and as constituting part of the trading book for capital requirement purposes;
  2. (2) the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market;
  3. (3) for positions that are marked-to-model, the extent to which the firm can:
    1. (a) identify all material risks of the position;
    2. (b) hedge all material risks of the position with instruments for which an active, liquid two-way market exists; and
    3. (c) derive reliable estimates for the key assumptions and parameters used in the model;
  4. (4) the extent to which the firm can, and is required to, generate valuations for the position that can be validated externally in a consistent manner;
  5. (5) the extent to which legal restrictions or other operational requirements would impede the firm's ability to effect a liquidation or hedge of the position in the short term;
  6. (6) the extent to which the firm can, and is required to, actively risk manage the position within its trading operation; and
  7. (7) the extent to which the firm may transfer risk or positions between the non-trading book and trading book and the criteria for such transfers.

[Note: CAD Annex VII Part D point 2]

BIPRU 1.2.28

handbook-guidance

The policies and procedures referred to in BIPRU 1.2.27 R (1) should cover:

  1. (1) the CRD financial instrument and commodities that the firm proposes to trade in, including the currencies, maturities, issuers and quality of issues; and
  2. (2) any instruments to be excluded from its trading book.

BIPRU 1.2.29

handbook-rule
  1. (1) The policies and procedures referred to in the overall financial adequacy rule and BIPRU 1.2.27 R must be recorded in a single written document. A firm may record those policies and procedures in more than one written document if the firm has a single written document that identifies:
    1. (a) all those other documents; and
    2. (b) the parts of those documents that record those policies and procedures.
  2. (2) A trading book policy statement means the single document referred to in this rule.

BIPRU 1.2.30

handbook-rule
  1. (1) A firm must notify the FSA as soon as is reasonably practicable when it adopts a trading book policy statement.
  2. (2) A firm must notify the FSA as soon as is reasonably practicable if the trading book policy statement is subject to significant changes.

BIPRU 1.2.31

handbook-guidance
A significant change for the purpose of the overall Pillar 2 rule includes new types of customers or business requiring different funding or provisioning.

BIPRU 1.2.32

handbook-guidance
There is likely to be an overlap between what the trading book policy statement should contain and other documents such as dealing or treasury manuals. A cross reference to the latter in the trading book policy statement is adequate and material in other documents need not be set out again in the trading book policy statement. However where this is the case the matters required to be included in the trading book policy statement should be readily identifiable.

BIPRU 1.2.33

handbook-guidance
The trading book policy statement may be prepared on either a consolidated or a solo (or solo-consolidated) basis. It should be prepared on a consolidated basis when a group either manages its trading risk centrally or employs the same risk management techniques in each group member. A trading book policy statement prepared on a consolidated basis should set out how it applies to each firm in the group and should be approved by each such firm's governing body.

Treatments common to the trading book and the non-trading book

BIPRU 1.2.34

handbook-guidance
Capital requirements for foreign currency risk and commodity position risk are the same whether the risk arises in the trading book or the non-trading book. The calculation of capital requirements for foreign currency risk is set out in BIPRU 7.5. The calculation of capital requirements for commodity position risk is set out in BIPRU 7.4.

Trading book treatments

BIPRU 1.2.35

handbook-guidance
All positions that are in a firm's trading book require capital to cover position risk and may require capital to cover counterparty credit risk and to cover large exposures. Counterparty credit risk in the trading book is dealt with by BIPRU 14 and capital for large exposures is covered by BIPRU 10.

Non-trading book treatments

BIPRU 1.2.36

handbook-guidance
All positions that are not in a firm's trading book are included in its non-trading book and subject capital requirements for the non-trading book unless they are deducted from capital resources under GENPRU 2.2 (Capital resources).

BIPRU 1.3

Applications for advanced approaches and waivers

Application

BIPRU 1.3.1

handbook-rule
This section of the Handbook applies to every BIPRU firm that wishes to apply for a permission to use any of the approaches set out in BIPRU 1.3.2 G.

Purpose

BIPRU 1.3.2

handbook-guidance
  1. (1) A firm may apply for an Article 129 permission or a waiver in respect of:
    1. (a) the IRB approach;
    2. (b) the advanced measurement approach;
    3. (c) the CCR internal model method; and
    4. (d) the VaR model approach.
  2. (2) A firm should apply for a waiver if it wants to:
    1. (a) apply the CAD 1 model approach; or
    2. (b) apply the master netting agreement internal models approach; or
    3. (c) disapply consolidated supervision under BIPRU 8 for its UK consolidation group or non-EEA sub-group; or
    4. (d) apply the treatment in BIPRU 2.1 (Solo-consolidation waiver); or
    5. (da) apply the treatment for a core UK group in BIPRU 3.2.25 R (Zero risk-weighting for intra-group exposures) or in BIPRU 10.8A (Intra-group exposures: core UK group); or
    6. (e) apply the treatment for a non-core large exposures group in BIPRU 10.9A (Intra-group exposures: non-core large exposures group); or
    7. (f) apply the treatment in BIPRU 10.6.35 R (Sovereign large exposure waiver).

Article 129

BIPRU 1.3.3

handbook-guidance
An EEA parent institution and its subsidiary undertakings or the subsidiary undertakings of its EEA parent financial holding company that wish to use any of the approaches listed in BIPRU 1.3.2 G (1) in respect of its group, including members of its group that are BIPRU firms, may apply for an Article 129 permission.

BIPRU 1.3.4

handbook-guidance
The Article 129 procedure allows an EEA parent institution and its subsidiary undertakings or the subsidiary undertakings of its EEA parent financial holding company to apply for permission to use the approaches in BIPRU 1.3.2 G (1) without making separate applications to the competent authority of each EEA State where members of a firm's group are authorised.

BIPRU 1.3.5

handbook-guidance

BIPRU 1.3.6

handbook-guidance
Where a firm or its group has been granted an Article 129 permission, each competent authority, including the lead competent authority, will need to take action to apply that Article 129 permission to the institutions that they authorise. Part 3 of the Capital Requirements Regulations 2006 governs how the FSA will take that action, whether or not the FSA is the lead competent authority.

Article 129 permissions and waivers - specific conditions

BIPRU 1.3.7

handbook-directions
When an advanced measurement approach is intended to be used by an EEA parent institution and its subsidiary undertakings or the subsidiary undertakings of an EEA parent financial holding company, the application of a firm in accordance with BIPRU 1.3.14 D must include the elements listed in BIPRU 6.5.5 R (Minimum standards for the advanced measurement approach).

[Note: BCD Article 105(2)]

BIPRU 1.3.8

handbook-directions
When an advanced measurement approach is intended to be used by an EEA parent institution and its subsidiary undertakings or the subsidiary undertakings of an EEA parent financial holding company, the application of a firm must include a description of the methodology used for allocating operational risk capital between the different entities of the group.

[Note: BCD annex X Part 3 point 30]

BIPRU 1.3.9

handbook-directions
For the purposes of BIPRU 1.3.8 D, the application of a firm must indicate whether and how diversification effects are intended to be factored in the risk measurement system.

[Note: BCD annex X Part 3 point 31]

Waiver - general

BIPRU 1.3.10

handbook-guidance

As explained in SUP 8, under of the Act, the FSA may not grant a waiver to a firm unless it is satisfied that:

  1. (1) compliance by the firm with the rules, or with the rules as modified, would be unduly burdensome or would not achieve the purpose for which the rules were made; and
  2. (2) the waiver would not result in undue risk to persons whose interests the rules are intended to protect objects.

BIPRU 1.3.11

handbook-guidance
The conditions relating to the use of an approach listed in BIPRU 1.3.2 G referred to in the relevant chapter of BIPRU are minimum standards. Satisfaction of those conditions does not automatically mean the FSA will grant a waiver referred to in those paragraphs. The FSA will in addition also apply the tests in section 148 of the Act.

BIPRU 1.3.12

handbook-guidance
In the FSA's view, if the minimum standards referred to in BIPRU 1.3.11 G are satisfied, the conditions referred to in BIPRU 1.3.10 G (1) will generally be met.

Forms and method of application

BIPRU 1.3.13

handbook-directions
Subject to BIPRU 1.3.14 D to BIPRU 1.3.20 D, if a firm wishes to apply for a waiver to apply an approach set out in BIPRU 1.3.2 G, it must comply with SUP 8.3.3 D.

BIPRU 1.3.14

handbook-directions
If a firm wishes to apply for a waiver or an Article 129 permission to use the advanced measurement approach, it must complete and submit the form in BIPRU 1 Annex 1D D.

BIPRU 1.3.15

handbook-directions
If a firm wishes to apply for a waiver or an Article 129 permission to use the IRB approach, it must complete and submit the form in BIPRU 1 Annex 2D D.

BIPRU 1.3.16

handbook-directions
If a firm wishes to apply for a waiver or an Article 129 permission to use the CCR internal model method, it must complete and submit the form in BIPRU 1 Annex 3D D.

BIPRU 1.3.17

handbook-directions
Where a firm makes an application in accordance with BIPRU 1.3.14 D, BIPRU 1.3.15 D or BIPRU 1.3.16 D, the firm must state on the application whether it is making an application for a waiver or an Article 129 permission.

BIPRU 1.3.18

handbook-directions
Where a firm applies for a VaR model permission, the firm must state whether it is making an application for a waiver or an Article 129 permission.

BIPRU 1.3.19

handbook-guidance
In respect of the application for waivers to apply the approaches set out in BIPRU 1.3.2 G (1), the FSA will aim to give decisions on applications as soon as practicable. However, the FSA expects that it will take a significant period to determine and give a decision due to the complexity of the issues raised by the applications. Details of timelines for applications for waivers to use advanced approaches and under the Article 129 procedure are set out on the FSA website.

BIPRU 1.3.20

handbook-directions
Where a firm applies for a solo consolidation waiver, it must demonstrate how each of the conditions set out in BIPRU 2.1.20 R to BIPRU 2.1.24 R are met and address the criteria set out in the guidance in BIPRU 2.1.25 G as part of its application in accordance with BIPRU 1.3.13 D.

BIPRU 1.3.21

handbook-guidance
Before sending in an application for a waiver or Article 129 permission, a firm may find it helpful to discuss the application with its usual supervisory contact at the FSA. However, the firm should still ensure that all relevant information is included in the application.

BIPRU 1.4

Actions for damages

  • 01/01/2007

BIPRU 1.4.1

handbook-rule
A contravention of the rules in BIPRU does not give rise to a right of action by a private person under section 150 of the Act (and each of those rules is specified under section 150(2) of the Act as a provision giving rise to no such right of action).

BIPRU 1 Annex 1D

Application form to apply the advanced measurement approach

  • 01/01/2007

handbook-directions

BIPRU 1 Annex 2D

Application form to apply the IRB approach

  • 01/01/2007

handbook-directions

BIPRU 1 Annex 3D

Application form to apply the CCR internal model method approach

  • 01/01/2007

handbook-directions

Export chapter as

BIPRU 2

Capital

BIPRU 2.1

Solo consolidation

  • 01/01/2007

Application

BIPRU 2.1.1

handbook-rule
This section applies to a BIPRU firm that has a solo consolidation waiver.

Purpose

BIPRU 2.1.2

handbook-guidance
The purpose of this section is to implement Articles 70 and 118 of the Banking Consolidation Directive. It also implements Articles 2 and 28 of the Capital Adequacy Directive so far as they apply those provisions of the Banking Consolidation Directive to CAD investment firms.

BIPRU 2.1.3

handbook-guidance
The rules in GENPRU and BIPRU do not allow a firm that is a parent undertaking to incorporate the capital and requirements of a subsidiary undertaking in the calculation of that firm's capital resources and capital resources requirement. A firm that wishes to incorporate a subsidiary undertaking for this purpose should therefore apply for a solo consolidation waiver.

Applying for a solo consolidation waiver

BIPRU 2.1.4

handbook-guidance
BIPRU 1.3 (Applications for advanced approaches) explains how to apply for a solo consolidation waiver.

General

BIPRU 2.1.5

handbook-guidance
The FSA will not grant a firm a solo consolidation waiver with respect to a subsidiary undertaking unless the firm and the subsidiary undertaking meet the standards in BIPRU 2.1.19 R to BIPRU 2.1.24 R.

BIPRU 2.1.6

handbook-guidance
A solo consolidation waiver will modify the relevant parts of GENPRU, BIPRU and SYSC referred to in BIPRU 2.1.7 R to BIPRU 2.1.8 R to apply BIPRU 2.1 to a firm.

The basic rules for solo consolidation

BIPRU 2.1.7

handbook-rule
A firm that has a solo consolidation waiver must incorporate in the calculation of its requirements under the main BIPRU firm Pillar 1 rules and BIPRU 10 (Large exposure requirements) each subsidiary undertaking to which the solo consolidation waiver applies. This does not apply to the base capital resources requirement.

BIPRU 2.1.8

handbook-rule
  1. (1) A firm that has a solo consolidation waiver must meet the obligations in SYSC 12.1.13 R (Application of certain systems and controls rules on a consolidated basis) on a consolidated basis with respect to the firm and each subsidiary undertaking to which the firm's solo consolidation waiver applies.
  2. (2) If (1) applies, SYSC 12.1.13 R applies to the group made up of the firm and its subsidiary undertakings referred to in (1) in the same way as it applies to a UK consolidation group or non-EEA sub-group.
  3. (3) If (1) applies, the provisions of SYSC and BIPRU listed in SYSC 12.1.13 R do not apply to the firm on a solo basis.

Solo consolidation and capital and concentration risk requirements

BIPRU 2.1.9

handbook-rule
BIPRU 2.1.10 R to BIPRU 2.1.18 R apply for the purposes of BIPRU 2.1.7 R.

BIPRU 2.1.10

handbook-rule
A firm must treat itself and each subsidiary undertaking referred to in BIPRU 2.1.7 R as a single undertaking and must apply, on that basis, BIPRU 8 (Group risk - consolidation) to the group made up of the firm and such subsidiary undertakings in the same way as BIPRU 8 applies to a UK consolidation group or non-EEA sub-group.

BIPRU 2.1.11

handbook-rule
Subject to BIPRU 2.1.13 R, a firm must calculate its capital resources in accordance with BIPRU 8.6 (Consolidated capital resources).

BIPRU 2.1.12

handbook-rule
A firm must calculate its capital resources requirement in accordance with BIPRU 8.7.13 R (3) (Treating group members as a single undertaking for consolidation purposes).

BIPRU 2.1.13

handbook-rule
Where GENPRU applies a different method of calculating capital resources or capital resources requirements depending on the category into which the firm in question falls, the method that applies is the one that would apply to the firm on a solo basis.

BIPRU 2.1.14

handbook-guidance
For example, the effect of BIPRU 2.1.13 R is that if a firm that is applying BIPRU 2.1 is a limited licence firm it should continue to apply the capital resources and capital resources requirement applicable to a limited licence firm.

BIPRU 2.1.15

handbook-rule
A firm must continue to calculate its base capital resources requirement and the requirement in GENPRU 2.1.42 R (Calculation of capital resources requirement on authorisation) on a solo basis.

BIPRU 2.1.16

handbook-rule
A firm must apply BIPRU 10 (Large exposure requirements) in accordance with BIPRU 8.9A (Consolidated large exposures requirements). Accordingly the firm must apply BIPRU 8.9A to the group made up of the firm and the subsidiary undertakings referred to in BIPRU 2.1.7 R in the same way as BIPRU 8.9A applies to a UK consolidation group or non-EEA sub-group.

BIPRU 2.1.17

handbook-guidance
One effect of BIPRU 2.1.16 R is that BIPRU 10.8A (Core UK groups) and BIPRU 10.9A (Non-core large exposures groups) do not apply. The corresponding provisions of BIPRU 8.9A (Consolidated large exposures requirements) apply instead.

BIPRU 2.1.18

handbook-rule
A firm must include in full any subsidiary undertaking in respect of which the firm applies BIPRU 2.1 in the calculations under BIPRU 2.1.7 R.

Minimum standards

BIPRU 2.1.19

handbook-rule
A firm must not apply BIPRU 2.1 to a subsidiary undertaking to which the firm's solo consolidation waiver applies BIPRU 2.1 unless in addition it meets the conditions in BIPRU 2.1.20 R to BIPRU 2.1.24 R.

BIPRU 2.1.20

handbook-rule
The risk evaluation, measurement and control procedures of the firm must cover the subsidiary undertaking referred to in BIPRU 2.1.19 R.

BIPRU 2.1.21

handbook-rule
The firm must hold more than 75% of the voting rights attaching to the shares in the capital of the subsidiary undertaking referred to in BIPRU 2.1.19 R and must have the right to appoint or remove a majority of the members of the governing body of the subsidiary undertaking.

BIPRU 2.1.22

handbook-rule
The material exposures or material liabilities of the subsidiary undertaking referred to in BIPRU 2.1.19 R must be to the firm.

BIPRU 2.1.23

handbook-rule
Where the firm is a parent institution in a Member State, it must have measures in place that ensure the satisfactory allocation of risks within the group consisting of the firm and each subsidiary undertaking to which BIPRU 2.1 is applied.

BIPRU 2.1.24

handbook-rule
A firm must be able to demonstrate fully to the FSA the circumstances and arrangements, including legal arrangements, by virtue of which there are no material practical or legal impediments, and none are foreseen, to the prompt transfer of the capital resources of the subsidiary undertaking referred to in BIPRU 2.1.19 R or repayment of liabilities when due by the subsidiary undertaking to the firm.

BIPRU 2.1.25

handbook-guidance

The following are the criteria that the FSA will take into account when considering whether the condition in BIPRU 2.1.24 R is going to be met:

  1. (1) the speed with which funds can be transferred or liabilities repaid to the firm and the simplicity of the method for the transfer or repayment;
  2. (2) whether there are any interests other than those of the firm in the subsidiary undertaking and what impact those other interests may have on the firm's control over the subsidiary undertaking and on the ability of the firm to require a transfer of funds or repayment of liabilities;
  3. (3) whether the prompt transfer of funds or repayment of liabilities to the firm might harm the reputation of the firm or its subsidiary undertakings;
  4. (4) whether there are any tax disadvantages for the firm or the subsidiary undertaking as a result of the transfer of funds or repayment of liabilities;
  5. (5) whether there are any exchange controls that may have an impact on the transfer of funds or repayment of liabilities;
  6. (6) whether there are assets in the subsidiary undertaking available either to be transferred or liquidated for the purposes of the transfer of funds or repayment of liabilities;
  7. (7) whether any regulatory requirements impact on the ability of the subsidiary undertaking to transfer funds or repay liabilities promptly;
  8. (8) whether the purpose of the subsidiary undertaking prejudices the prompt transfer of funds or repayment of liabilities;
  9. (9) whether the legal structure of the subsidiary undertaking prejudices the prompt transfer of funds or repayment of liabilities;
  10. (10) whether the contractual relationships of the subsidiary undertaking with the firm and other third parties prejudices the prompt transfer of funds or repayment of liabilities;
  11. (11) whether past and proposed flows of funds between the subsidiary undertaking and the firm demonstrate the ability to make prompt transfer of funds or repayment of liabilities; and
  12. (12) whether the degree of solo consolidation by the firm undermines the FSA's ability to assess the soundness of the firm as a legal entity (taking into account any other subsidiary undertakings to which BIPRU 2.1 is being applied).

BIPRU 2.1.26

handbook-guidance
The effect of BIPRU 2.1.19 R is that even though a firm's solo consolidation waiver applies BIPRU 2.1 with respect to a subsidiary undertaking, the firm should not apply BIPRU 2.1 with respect to that subsidiary undertaking unless in addition it meets the conditions in BIPRU 2.1.20 R to BIPRU 2.1.24 R.

BIPRU 2.1.27

handbook-guidance
A firm should not apply BIPRU 2.1 to a subsidiary undertaking to which the firm's solo consolidation waiver applies if it ceases to be a subsidiary undertaking of the firm even if the solo consolidation waiver is not varied by removing the subsidiary undertaking.

BIPRU 2.1.28

handbook-guidance
If a subsidiary undertaking referred to in BIPRU 2.1.27 G later becomes a subsidiary undertaking again the firm should not apply BIPRU 2.1 to it unless the solo consolidation waiver is varied to re-apply it with respect to the subsidiary undertaking.

BIPRU 2.2

Internal capital adequacy standards

  • 01/01/2007

Application

BIPRU 2.2.1

handbook-guidance
BIPRU 2.2 applies to a BIPRU firm.

Purpose

BIPRU 2.2.2

handbook-guidance
  1. (1) BIPRU 2.2 sets out guidance on GENPRU 1.2 (Adequacy of financial resources) so far as it applies to a BIPRU firm. In particular it sets out guidance on how a firm should carry out its ICAAP, as well as some factors the FSA will take into consideration when undertaking a SREP. The terms ICAAP and SREP are explained in BIPRU 2.2.4 G. BIPRU 2.2.41 R-BIPRU 2.2.43 R are rules that apply to a firm with an IRB permission.
  2. (2) BIPRU 2.2 is for the most part written on the basis that GENPRU 1.2 (Adequacy of financial resources) applies to a firm on a solo basis. However it is still relevant when GENPRU 1.2 applies on a consolidated basis. When GENPRU 1.2 applies on a consolidated basis, BIPRU 2.2 should be read with appropriate adjustments.

Meaning of capital

BIPRU 2.2.3

handbook-guidance
For the purpose of BIPRU 2.2, "capital" refers to a firm's financial resources, capital resources and internal capital, all as referred to in the overall Pillar 2 rule.

The ICAAP and the SREP: Introduction

BIPRU 2.2.4

handbook-guidance

The adequacy of a firm's capital needs to be assessed both by a firm and the FSA. This process involves:

  1. (1) an internal capital adequacy assessment process (ICAAP), which a firm is obliged to carry out in accordance with the ICAAP rules; and
  2. (2) a supervisory review and evaluation process (SREP), which is conducted by the FSA.

The ICAAP and the SREP: The ICAAP

BIPRU 2.2.5

handbook-guidance

The obligation to conduct an ICAAP, includes requirements on a firm to:

  1. (1) carry out regularly assessments of the amounts, types and distribution of financial resources, capital resources and internal capital that it considers adequate to cover the nature and level of the risks to which it is or might be exposed (GENPRU 1.2.30 R to GENPRU 1.2.41 G (the overall Pillar 2 rule and related rules);
  2. (2) identify the major sources of risk to its ability to meet its liabilities as they fall due (the overall Pillar 2 rule);
  3. (3) conduct stress and scenario tests (the general stress and scenario testing rule), taking into account, in the case of a firm with an IRB permission, the stress test required by BIPRU 4.3.39 R to BIPRU 4.3.40 R (Stress tests used in assessment of capital adequacy for a firm with an IRB permission);
  4. (4) ensure that the processes, strategies and systems required by the overall Pillar 2 rule and used in its ICAAP, are both comprehensive and proportionate to the nature, scale and complexity of that firm's activities (GENPRU 1.2.35 R); and
  5. (5) document its ICAAP (GENPRU 1.2.60 R).

BIPRU 2.2.6

handbook-guidance
Where a firm is a member of a group, it should base its ICAAP on the consolidated financial position of the group. The group assessment should include information on diversification benefits and transferability of resources between members of the group and an apportionment of the capital required by the group as a whole to the firm (GENPRU 1.2.44 G to GENPRU 1.2.56 G (Application of GENPRU 1.2 on a solo and consolidated basis: Processes and tests)). A firm may, instead of preparing the ICAAP itself, adopt as its ICAAP an assessment prepared by other group members.

BIPRU 2.2.7

handbook-guidance

A firm should ensure that its ICAAP is:

  1. (1) the responsibility of the firm's governing body;
  2. (2) reported to the firm's governing body; and
  3. (3) forms an integral part of the firm's management process and decision-making culture.

The ICAAP and the SREP: The SREP

BIPRU 2.2.8

handbook-guidance
The FSA will review a firm's ICAAP, including the results of the firm's stress tests carried out under GENPRU and BIPRU, as part of its SREP. Provided that the FSA is satisfied with the appropriateness of a firm's capital assessment, the FSA will take into account that firm's ICAAP and stress tests in its SREP. More material on stress tests for a firm with an IRB permission can be found in BIPRU 2.2.41 R to BIPRU 2.2.45 G.

BIPRU 2.2.9

handbook-guidance

The SREP is a process under which the FSA:

  1. (1) reviews the arrangements, strategies, processes and mechanisms implemented by a firm to comply with GENPRU, BIPRU and SYSC and with requirements imposed by or under the regulatory system and evaluates the risks to which the firm is or might be exposed;
  2. (2) determines whether the arrangements, strategies, processes and mechanisms implemented by the firm and the capital held by the firm ensures a sound management and coverage of the risks in (1); and
  3. (3) (if necessary) requires the firm to take the necessary actions or steps at an early stage to address any failure to meet the requirements referred to in (1).

BIPRU 2.2.10

handbook-guidance
As part of its SREP, the FSA may ask a firm to provide it with the results of that firm's ICAAP, together with an explanation of the process used. Where appropriate, the FSA will ask for additional information on the ICAAP.

BIPRU 2.2.11

handbook-guidance
As part of its SREP, the FSA will consider whether the amount and quality of capital which a firm should hold to meet its CRR in GENPRU 2.1 (Calculation of capital resources requirements) is sufficient for that firm to comply with the overall financial adequacy rule.

BIPRU 2.2.12

handbook-guidance
After completing a review as part of the SREP, the FSA will normally give that firm individual guidance (individual capital guidance), advising it of the amount and quality of capital which it should hold to meet the overall financial adequacy rule.

BIPRU 2.2.12A

handbook-guidance
As part of its SREP, the FSA will also consider whether a firm should hold a capital planning buffer and, in that case, the amount and quality of such capital planning buffer. In making these assessments, the FSA will have regard to the nature, scale and complexity of a firm's business and of the major sources of risks relevant to such business as referred to in the general stress and scenario testing rule. Accordingly, a firm's capital planning buffer should be of sufficient amount and adequate quality to allow the firm to continue to meet the overall financial adequacy rule in the face of adverse circumstances, after allowing for realistic management actions.

BIPRU 2.2.12B

handbook-guidance
After completing a review as part of the SREP, the FSA may notify the firm of the amount and quality of capital which it should hold as a capital planning buffer over and above the level of capital recommended as its ICG. The FSA may set a firm's capital planning buffer either as an amount and quality of capital which it should hold now (that is, at the time of the FSA's notification following the firm's SREP) or, in exceptional cases, as a forward looking target that the firm should build up over time.

BIPRU 2.2.12C

handbook-guidance
Where the amount or quality of capital which the FSA considers a firm should hold to meet the overall financial adequacy rule or as a capital planning buffer is not the same as that which results from a firm's ICAAP, the FSA usually expects to discuss any such difference with the firm. Where necessary, the FSA may consider the use of its powers under section 166 of the Act (Reports by skilled persons) to assist in such circumstances.

BIPRU 2.2.13

handbook-guidance
If a firm considers that the individual capital guidance given to it is inappropriate to its circumstances it should, consistent with Principle 11 (Relations with regulators), inform the FSA that it disagrees with that guidance. The FSA may reissue individual capital guidance if, after discussion with the firm, the FSA concludes that the amount or quality of capital that the firm should hold to meet the overall financial adequacy rule is different from the amount or quality initially suggested by the FSA.

BIPRU 2.2.13A

handbook-guidance
If a firm disagrees with the FSA's assessment as to the amount or quality of capital planning buffer that it should hold, it should, consistent with Principle 11 (Relations with regulators), notify the FSA of its disagreement. The FSA may reconsider its initial assessment if, after discussion with the firm, the FSA concludes that the amount or quality of capital that the firm should hold as capital planning buffer is different from the amount or quality initially suggested.

BIPRU 2.2.14

handbook-guidance
The FSA will not give individual capital guidance to the effect that the amount of capital advised in that guidance is lower than the amount of capital which a firm should hold to meet its CRR.

BIPRU 2.2.15

handbook-guidance
If, after discussion, the FSA and a firm still do not agree on an adequate level of capital, the FSA may consider using its powers under section 45 of the Act to vary on its own initiative a firm's Part IV permission so as to require it to hold capital in accordance with the FSA's view of the capital necessary to comply with the overall financial adequacy rule. In deciding whether it should use its powers under section 45, the FSA will take into account the amount and quality of the capital planning buffer which the firm should hold as referred to in BIPRU 2.2.12A G and BIPRU 2.2.12B G. SUP 7 provides further information about the FSA's powers under section 45.

The drafting of individual capital guidance and capital planning buffer

BIPRU 2.2.16

handbook-guidance
If the FSA gives individual capital guidance to a firm, the FSA will state what amount and quality of capital the FSA considers the firm needs to hold in order to comply with the overall financial adequacy rule. It will generally do so by saying that the firm should hold capital resources of an amount which is at least equal to a specified percentage of that firm's capital resources requirement plus one or more static add-ons in relation to specific risks in accordance with the overall Pillar 2 rule.

BIPRU 2.2.17

handbook-guidance
  1. (1) Individual capital guidance may refer to two types of capital resources.
  2. (2) The first type is referred to as general capital. It refers to total tier one capital resources and tier two capital resources after deductions.
  3. (3) The second type is referred to as total capital. It refers to total tier one capital resources, tier two capital resources and tier three capital resources after deductions.

BIPRU 2.2.18

handbook-guidance
  1. (1) In both of the cases in BIPRU 2.2.17 G capital resources should be calculated in the same way as they are in GENPRU 2.2 (Capital resources). This includes the rules limiting the amount of capital that can be included in the various tiers of capital when capital resources are being calculated.
  2. (2) GENPRU 2.2.42 R does not allow innovative tier one capital to count as tier one capital resources for certain purposes. This restriction does not apply for the purposes in BIPRU 2.2.17 G.

BIPRU 2.2.19

handbook-guidance
  1. (1) Individual capital guidance may also be given with respect to group capital resources. This paragraph explains how such guidance should be interpreted unless the individual capital guidance specifies another interpretation.
  2. (2) If BIPRU 8.2.1 R (General consolidation rule for a UK consolidation group) applies to the firm the guidance relates to its UK consolidation group. If BIPRU 8.3.1 R (General consolidation rule for a non-EEA sub-group) applies to the firm the guidance relates to its non-EEA sub-group. If both apply to the firm the guidance relates to its UK consolidation group and to its non-EEA sub-group.
  3. (3) The guidance will be on the overall financial adequacy rule as it applies on a consolidated basis under GENPRU 1.2.59 R (Application of GENPRU 1.2 on a solo and consolidated basis: Adequacy of resources) and insofar as it refers to capital resources.
  4. (4) BIPRU 2.2.16 G to BIPRU 2.2.18 G apply for the purpose of this paragraph as they apply to guidance given on a solo basis. References to capital resources should be read as being to consolidated capital resources.

BIPRU 2.2.19A

handbook-guidance
Where the FSA notifies a firm that it should hold a capital planning buffer, the notification will state what amount and quality of capital the FSA considers that is adequate for the firm to hold as such. This will normally be notified to the firm together with its individual capital guidance and expressed as a separate amount of capital resources that the firm should hold in excess of the amount of capital resources indicated as its individual capital guidance.

BIPRU 2.2.19B

handbook-guidance
For the purposes of BIPRU 2.2.19A G, BIPRU 2.2.17 G to BIPRU 2.2.19 G apply as they apply to individual capital guidance. References in those provisions to individual capital guidance or guidance should be read as if they were references to capital planning buffer. In relation to BIPRU 2.2.19G (3) and GENPRU 1.2.59 R, where the general stress and scenario testing rule, as part of the ICAAP rules, applies to a firm on a consolidated basis, the FSA may notify the firm that it should hold a group capital planning buffer. In these cases, the firm should ensure that the group holds a capital planning buffer of sufficient amount and adequate quality to allow it to continue to meet the overall financial adequacy rule in the face of adverse circumstances, after allowing for realistic management actions.

Failure to meet individual capital guidance and monitoring and reporting on the capital planning buffer

BIPRU 2.2.20

handbook-guidance

A firm's continuing to hold capital in accordance with its individual capital guidance and its ability to carry on doing so is a fundamental part of the FSA's supervision of that firm. Therefore if a firm's capital resources have fallen, or are expected to fall, below the level advised in individual capital guidance, then, consistent with Principle 11 (Relations with regulators), a firm should inform the FSA of this fact as soon as practicable, explaining why this has happened or is expected to happen and:

  1. (1) what action the firm intends to take to increase its capital resources or to reduce its risks and hence its capital requirements; or
  2. (2) what modification the firm considers should be made to the individual capital guidance which it has been given.

BIPRU 2.2.21

handbook-guidance
In the circumstance set out in BIPRU 2.2.20 G, the FSA may ask a firm for alternative or more detailed proposals and plans or further assessments and analyses of capital adequacy and risks faced by the firm. The FSA will seek to agree with the firm appropriate timescales and scope for any such additional work, in light of the circumstances which have arisen.

BIPRU 2.2.22

handbook-guidance
If a firm has not accepted individual capital guidance given by the FSA it should, nevertheless, inform the FSA as soon as practicable if its capital resources have fallen, or are expected to fall, below the level suggested by that individual capital guidance.

BIPRU 2.2.23

handbook-guidance
Monitoring the use of a firm's capital planning buffer is also a fundamental part of the FSA's supervision of that firm. A firm should only use its capital planning buffer to absorb losses or meet increased capital requirements if certain adverse circumstances materialise. These should be circumstances beyond the firm's normal and direct control, whether relating to a deteriorating external environment or periods of stress such as macroeconomic downturns or financial/market shocks, or firm-specific circumstances.

BIPRU 2.2.23A

handbook-guidance

Consistent with Principle 11 (Relations with regulators), a firm should notify the FSA as early as possible in advance where it has identified that it would need to use its capital planning buffer. The firm's notification should at least state:

  1. (1) what adverse circumstances are likely to force the firm to draw down its capital planning buffer;
  2. (2) how the capital planning buffer will be used up in line with the firm's capital planning projections; and
  3. (3) what plan is in place for the eventual restoration of the capital planning buffer.

BIPRU 2.2.23B

handbook-guidance
Following discussions with the firm on the items listed in BIPRU 2.2.23AG (1) to BIPRU 2.2.23AG (3), the FSA may put in place additional reporting arrangements to monitor the firm's use of its capital planning buffer in accordance with the plan referred to in BIPRU 2.2.23AG (3). The FSA may also identify specific trigger points as the capital planning buffer is being used up by the firm, which could lead to additional supervisory actions.

BIPRU 2.2.23C

handbook-guidance
Where a firm's capital planning buffer is being drawn down due to circumstances other than those referred to in BIPRU 2.2.23 G, such as poor planning or mismanagement, the FSA may ask the firm for more detailed plans for it to restore its capital planning buffer. In the light of the relevant circumstances, the FSA may consider taking other remedial actions, which may include using its powers under section 45 of the Act to vary on its own initiative a firm's Part IV permission.

BIPRU 2.2.23D

handbook-guidance
A firm should inform the FSA where its capital planning buffer is likely to start being drawn down even if it has not accepted the FSA's assessment as to the amount or quality of its capital planning buffer.

BIPRU 2.2.23E

handbook-guidance
Where a firm has started to use its capital planning buffer in circumstances where it was not possible to notify in advance, it should notify the FSA and provide the information referred to in BIPRU 2.2.23A G as soon as practicable afterwards.

BIPRU 2.2.23F

handbook-guidance
BIPRU 2.2.20 G to BIPRU 2.2.23E G also apply to individual capital guidance and to capital planning buffer on a consolidated basis as referred to in BIPRU 2.2.19 G.

Proportionality of an ICAAP

BIPRU 2.2.24

handbook-guidance
BIPRU 2.2.25 G to BIPRU 2.2.27 G set out what the FSA considers to be a proportional approach to preparing an ICAAP as referred to in GENPRU 1.2.35 R (The processes, strategies and systems required by the overall Pillar 2 rule should be comprehensive and proportionate), according to the relative degree of complexity of a firm's activities. If a firm adopts the appropriate approach, it may enable the FSA more easily to review a firm's ICAAP when the FSA undertakes its SREP. The FSA is also likely to place more reliance on an ICAAP which takes the appropriate form described in BIPRU 2.2.25 G to BIPRU 2.2.27 G than would otherwise be the case although there may also be circumstances in which the FSA will be able to rely on an ICAAP that is not drawn up in that form.

BIPRU 2.2.25

handbook-guidance
  1. (1) This paragraph applies to a small firm whose activities are simple and primarily not credit-related.
  2. (2) In carrying out its ICAAP it could:
    1. (a) identify and consider that firm's largest losses over the last 3 to 5 years and whether those losses are likely to recur;
    2. (b) prepare a short list of the most significant risks to which that firm is exposed;
    3. (c) consider how that firm would act, and the amount of capital that would be absorbed, in the event that each of the risks identified were to materialise;
    4. (d) consider how that firm's CRR might alter under the scenarios in (c) and how its CRR might alter in line with its business plans for the next 3 to 5 years;
    5. (e) consider whether any of the risks in the overall Pillar 2 rule is applicable to the firm (it is unlikely that any of those risks not already identified in (a) or (b) will apply to a firm whose activities are simple);
    6. (f) document the ranges of capital required in the scenarios identified and form an overall view on the amount and quality of capital which that firm should hold, ensuring that its senior management is involved in arriving at that view; and
    7. (g) (in order to determine the amount of capital that would be absorbed in the circumstances detailed in (c)) carry out simple sensitivity tests where the firm analyses the impact of a shift in the key risk parameters identified in (b) on the earnings of the firm.
  3. (3) A firm is also expected to form a view on the consolidated amount of capital it should hold as well as the capital required to be held in respect of each of the individual risks identified under the overall Pillar 2 rule. For that purpose, it may conservatively sum the results of the individual tests performed in (2)(c). If the firm chooses however to reduce that sum on the understanding that not all risks will materialise at the same time, then the firm should perform scenario tests that demonstrate that a reduction in capital is legitimate.
  4. (4) A firm should conduct stress tests and scenario analyses in accordance with GENPRU 1.2.42 R to assess how that firm's capital and CRR would alter and what that firm's reaction might be to a range of adverse scenarios, including operational and market events. Where relevant, a firm should also consider the impact of a severe economic or industry downturn on its future earnings, capital resources and capital resources requirement, taking into account its business plans. The downturn scenario should be based on forward looking hypothetical events calibrated against the most adverse movements in individual risk drivers experienced over a long historical period.

BIPRU 2.2.26

handbook-guidance

In relation to a firm whose activities are moderately complex, in carrying out its ICAAP, BIPRU 2.2.25 G (3) to (4) apply. In addition, it could:

  1. (1) having consulted the management in each major business line, prepare a comprehensive list of the major risks to which the business is exposed;
  2. (2) estimate, with the aid of historical data, where available, the range and distribution of possible losses which might arise from each of those risks and consider using shock stress tests to provide risk estimates;
  3. (3) consider the extent to which that firm's CRR adequately captures the risks identified in (1) and (2);
  4. (4) for areas in which the CRR is either inadequate or does not address a risk, estimate the additional capital (if any) needed to protect that firm and its customers, in addition to any other risk mitigation action that firm plans to take;
  5. (5) consider the risk that that firm's own analyses of capital adequacy may be inaccurate and that it may suffer from management weaknesses, which affect the effectiveness of its risk management and mitigation;
  6. (6) project that firm's business activities forward in detail for one year and in less detail for the next 3 to 5 years and estimate how that firm's capital and CRR would alter, assuming that business develops as expected;
  7. (7) assume that business does not develop as expected and consider how that firm's capital and CRR would alter and what that firm's reaction to a range of adverse economic scenarios might be (see GENPRU 1.2.30 R to GENPRU 1.2.43 G (the overall Pillar 2 rule and related rules and guidance)). Where appropriate, the adverse scenarios should consider the impact of market events that are instantaneous or occur over an extended period of time but which are nevertheless still co-dependent on movements in economic conditions;
  8. (8) document the results obtained from the analyses in (2), (4), (6), and (7) in a detailed report for that firm's senior management, and, where relevant, its governing body; and
  9. (9) ensure that systems and processes are in place to review against performance the accuracy of the estimates made in (2), (4), (6) and (7).

BIPRU 2.2.27

handbook-guidance
  1. (1) This paragraph applies to a proportional ICAAP in the case of a firm whose activities are complex.
  2. (2) A proportional approach to that firm's ICAAP should cover the matters identified in BIPRU 2.2.26 G, but is likely also to involve the use of models, most of which will be integrated into its day-to-day management and operation.
  3. (3) Models of the sort referred to in (2) may be linked so as to generate an overall estimate of the amount of capital that a firm considers appropriate to hold for its business needs. For example, a firm is likely to use value at risk models for market risk (see BIPRU 7.10), advanced modelling approaches for credit risk (see BIPRU 4) and, possibly, advanced measurement approaches for operational risk (see BIPRU 6.5). A firm might also use economic scenario generators to model stochastically its business forecasts and risks. A firm may also link such models to generate information on the economic capital desirable for that firm. A model which a firm uses to generate its target amount of economic capital is known as an economic capital model (ECM). Economic capital is the target amount of capital which maximises the return for a firm's stakeholders for a desired level of risk.
  4. (4) A firm is also likely to be part of a group and to be operating internationally. There is likely to be centralised control over the models used throughout the group, the assumptions made and their overall calibration.
  5. (5) The more a firm integrates into its business such economic capital modelling, the more it is likely to focus on managing risks for the benefit of its stakeholders. Consequently, ECMs may produce capital estimates that differ from the amount of capital needed for regulatory purposes. For the FSA to rely on the results of a firm's models, including ECMs, a firm should be able to explain the basis and results of its models and how the amount of capital produced by its models reflects the amount of capital needed for regulatory purposes. It may be that those amounts are not equal. Where they are not equal, the FSA will expect a firm to discuss any differences with the FSA. However, it may prove difficult to reconcile the outcome of a firm's modelling with the FSA's own assessment of the adequacy of that firm's capital. This may be the case when, for instance, matters of judgment are involved in arriving at a firm's capital assessment, or the FSA relies on information which cannot be fully disclosed to the firm (for example comparisons with the firm's peers). Nevertheless, a firm whose ECM produces a different amount of capital to that required for regulatory purposes is still obliged to comply with the overall Pillar 2 rule. A firm should therefore be able to explain to the FSA how the outcome of its ECM is adjusted so that it complies with the overall financial adequacy rule and the overall Pillar 2 rule.
  6. (6) Stress testing should provide senior management with a consolidated view of the amount of risk the firm is or might be exposed to under the chosen stress events. Senior management should therefore be presented with information that considers the possibility of the risks materialising simultaneously in various proportions. For instance, it would be misrepresentative to simulate market risk stressed events without considering that, in those circumstances, market counterparties may be more likely to default. Accordingly, a firm could:
    1. (a) carry out combined stress tests where assets and liabilities are individually subjected to simultaneous changes in two or more risk drivers; for instance, the change in value of each loan made by a firm may be estimated using simultaneous changes to both interest rates and stock market or property values;
    2. (b) integrate the results of market and credit risk models rather than aggregating the results of each model separately; and
    3. (c) consider scenarios which include systemic effects on the firm of wider failures in the firm's market or systems upon which the firm depends and also any possible systemic effects caused by the firm itself suffering losses which affect other market participants which in turn exacerbate the firm's position.
  7. (7) Furthermore, if a complex firm uses an ECM it should validate the assumptions of the model through a comprehensive stress testing programme. In particular this validation should:
    1. (a) test correlation assumptions (where risks are aggregated in this way) using combined stresses and scenario analyses;
    2. (b) use stress tests to identify the extent to which the firm's risk models omit non-linear effects, for instance the behaviour of derivatives in market risk models; and
    3. (c) consider not just the effect of parallel shifts in interest rate curves, but also the effect of curves becoming steeper or flatter.

Guidance on risks to be covered in an ICAAP

BIPRU 2.2.28

handbook-guidance
BIPRU 2.2.30 G to BIPRU 2.2.40 G set out guidance on some of the sources of risk identified in the overall Pillar 2 rule. BIPRU 2.2.41 R to BIPRU 2.2.45 G have material relating to a firm with an IRB permission.

BIPRU 2.2.29

handbook-guidance
  1. (1) A firm may take into account factors other than those identified in the overall Pillar 2 rule when it assesses the level of capital it wishes to hold. These factors might include external rating goals, market reputation and its strategic goals. However, a firm should be able to distinguish, for the purpose of its dialogue with the FSA, between capital it holds in order to comply with the overall financial adequacy rule, capital that it holds as a capital planning buffer and capital held for other purposes.
  2. (2) The calibration of the CRR assumes that a firm's business is well-diversified, well-managed with assets matching its liabilities and good controls, and stable with no large, unusual or high risk transactions. A firm may find it helpful to assess the extent to which its business in fact differs from these assumptions and therefore what adjustments it might be reasonable for it to make to the CRR to arrive at an adequate level of capital resources.

Interest rate risk arising from non-trading book activities

BIPRU 2.2.30

handbook-guidance
A firm should assess its exposure to changes in interest rates, in particular risks arising from the effect of interest rate changes on non-trading book activities that are not captured by the CRR. In doing so, a firm may wish to use stress tests to determine the impact on its balance sheet of a change in market conditions.

Securitisation risk

BIPRU 2.2.31

handbook-guidance
A firm should assess its exposure to risks transferred through the securitisation of assets should those transfers fail for whatever reason. A firm should consider the effect on its financial position of a securitisation arrangement failing to operate as anticipated or of the values and risks transferred not emerging as expected.

Residual risk

BIPRU 2.2.32

handbook-guidance
A firm should assess its exposure to residual risks that may result from the partial performance or failure of credit risk mitigation techniques for reasons that are unconnected with their intrinsic value. This could result from, for instance, ineffective documentation, a delay in payment or the inability to realise payment from a guarantor in a timely manner. Given that residual risks can always be present, a firm should assess the appropriateness of its CRR against its assumptions which underlie any risk mitigation measures it may have in place.

Concentration risk

BIPRU 2.2.33

handbook-guidance
A firm should assess, and monitor, in detail its exposure to sectoral, geographic, liability and asset concentrations. The FSA considers that concentrations in these areas increase a firm's exposure to credit risk. Where a firm identifies such concentrations it should consider the adequacy of its CRR.

Liquidity risk

BIPRU 2.2.34

handbook-guidance
In accordance with the overall Pillar 2 rule a firm should consider its exposure to liquidity risk and assess its response should that risk materialise.

BIPRU 2.2.35

handbook-guidance
When assessing liquidity risk, a firm should consider the extent to which there is a mismatch between assets and liabilities.

BIPRU 2.2.36

handbook-guidance
A firm should also, when assessing liquidity risk, consider the amount of assets it holds in highly liquid, marketable forms that are available should unexpected cash flows lead to a liquidity problem. The price concession of liquidating assets is of prime concern when assessing such liquidity risk and should therefore be built into a firm's ICAAP.

BIPRU 2.2.37

handbook-guidance

Some further areas to consider in developing the liquidity risk scenario might include:

  1. (1) any mismatching between expected asset and liability cash flows;
  2. (2) the inability to sell assets quickly;
  3. (3) the extent to which a firm's assets have been pledged; and
  4. (4) the possible need to reduce large asset positions at different levels of market liquidity and the related potential costs and timing constraints.

Business risk: General

BIPRU 2.2.38

handbook-guidance
A firm's CRR, being risk-sensitive, may vary as business cycles and economic conditions fluctuate over time. A deterioration in business or economic conditions could require a firm to raise capital or, alternatively, to contract its businesses, at a time when market conditions are most unfavourable to raising capital. Such an effect is known as procyclicality.

BIPRU 2.2.39

handbook-guidance
To reduce the impact of cyclical effects, a firm should aim to maintain an adequate capital planning buffer during an upturn in business and economic cycles such that it has sufficient capital available to protect itself in unfavourable market conditions.

BIPRU 2.2.40

handbook-guidance
To assess its expected capital requirements over the economic and business cycles, a firm may wish to project forward its financial position taking account of its business strategy and expected growth according to a range of assumptions as to the state of the economic or business environment which it faces. For example, an ICAAP should include an analysis of the impact that the actions of a firm's competitors might have on its performance, in order to see what changes in its environment the firm could sustain. Projections over a three to five year period would be appropriate in most circumstances. A firm may then calculate its projected CRR and assess whether it could be met from expected financial resources. Additional guidance on capital planning over an economic and business cycle can be found in GENPRU 1.2.73A G (Capital planning).

Business risk: Stress tests for firms using the IRB approach

BIPRU 2.2.41

handbook-rule
A firm with an IRB permission must ensure that there is no significant risk that it will not be able to meet its capital resource requirements for credit risk under GENPRU 2.1 (Calculation of capital resources requirements) at all times throughout an economic cycle, including the capital resources requirements for credit risk indicated by any stress test carried out under BIPRU 4.3.39 R to BIPRU 4.3.40 R (Stress tests used in assessment of capital adequacy for a firm with an IRB permission) as being likely to apply in the scenario tested. For the purpose of deciding what capital resources are or will be available to meet those credit risk requirements from time to time a firm must exclude capital resources that are likely to be required to meet its other capital requirements under GENPRU 2.1 at the relevant time. A firm must also be able to demonstrate to the FSA at any time that it is complying with this rule.

BIPRU 2.2.42

handbook-rule
BIPRU 2.2.41 R applies to a firm on a solo basis if BIPRU 4 (IRB approach) applies to it on a solo basis and applies on a consolidated basis if BIPRU 4 does.

BIPRU 2.2.43

handbook-rule

If BIPRU 2.2.41 R applies to a firm on a consolidated basis the following adjustments are made to BIPRU 2.2.41 R in accordance with the general principles of BIPRU 8 (Group risk - consolidation):

  1. (1) references to capital resources are to the consolidated capital resources of the firm's UK consolidation group or, as the case may be, its non-EEA sub-group; and
  2. (2) references to the capital requirements in GENPRU 2.1 (Calculation of capital resources requirements) are to the consolidated capital requirements with respect to the firm's UK consolidation group or, as the case may be, its non-EEA sub-group under BIPRU 8 (Group risk - consolidation).

BIPRU 2.2.44

handbook-guidance
If a firm's current available capital resources are less than the capital resources requirement indicated by the stress test that need not be a breach of BIPRU 2.2.41 R. The firm may wish to set out any countervailing effects and off-setting actions that can be demonstrated to the satisfaction of the FSA as being likely to reduce the difference referred to in the first sentence. The FSA is only likely to consider a demonstration of such actions as credible if those actions are set out in a capital management plan based on the procedures in GENPRU 1.2.73A G (Capital planning) and including a plan of the type referred to in GENPRU 1.2.73A G (5) that has been approved by the firm's senior management or governing body.

BIPRU 2.2.45

handbook-guidance
The countervailing factors and off-setting actions that a firm may rely on as referred to in BIPRU 2.2.44 G include, but are not limited to, projected balance sheet shrinkage, growth in capital resources resulting from retained profits between the date of the stress test and the projected start of the economic downturn, the possibility of raising new capital in a downturn, the ability to reduce dividend payments or other distributions, and the ability to allocate capital from other risks which can be shown to be negatively correlated with the firm's credit risk profile.

Systems and controls

BIPRU 2.2.46

handbook-guidance

A firm may decide to hold additional capital to mitigate any weaknesses in its overall control environment. These weaknesses might be indicated by the following:

  1. (1) a failure by a firm to complete an assessment of its systems and controls to establish whether they comply with SYSC; or
  2. (2) a failure by a firm's senior management to approve its financial results; or
  3. (3) a failure by a firm to consider an analysis of relevant internal and external information on its business and control environment.

BIPRU 2.2.47

handbook-guidance
In considering if there are any systems and control weaknesses and their effect on the adequacy of the CRR, a firm should be able to demonstrate to the FSA that all the issues identified in SYSC have been considered and that appropriate plans and procedures exist to deal adequately with adverse scenarios.

Risks which may be considered according to the nature of the activities of a firm

BIPRU 2.2.48

handbook-guidance
  1. (1) BIPRU 2.2.49 G to BIPRU 2.2.70 G set out guidance for:
    1. (a) a bank or building society;
    2. (b) an asset management firm; and
    3. (c) a securities firm;
  2. whose activities are either simple or moderately complex.
  3. (2) BIPRU 2.2.49 G to BIPRU 2.2.70 G provide examples of the sorts of risks which such a firm might typically face and of stress tests or scenario analyses which it might carry out as part of its ICAAP.
  4. (3) The material on securities firms is also relevant to a commodities firm.

Banks and building societies

BIPRU 2.2.49

handbook-guidance
The FSA considers that the concentration risk resulting from concentrated portfolios is significant for most banks and building societies.

BIPRU 2.2.50

handbook-guidance
If a bank or building society chooses to use the CRR as a starting point for its capital assessment, it should remember that, when assessing its exposure to concentration risk, the calculation of the CRR is based on the assumption that a firm is well-diversified.

BIPRU 2.2.51

handbook-guidance
In assessing the degree of credit concentration, a bank or building society should consider its degree of credit concentration in a particular economic or geographic area. Where the business of a firm is, by its nature, concentrated (for example, a specialised firm lending to one sector only), a firm should consider the impact of adverse economic factors, such as a rise in unemployment in the area in which it has a concentration of exposures, and its impact on asset quality. A gradual change of cultural environment could also affect a bank or building society and a firm should consider whether this issue should be the subject of scenario analysis.

BIPRU 2.2.52

handbook-guidance
Typically, a building society's portfolio is concentrated. The extent to which a building society can diversify its business is limited. A building society should, nevertheless, consider the impact of geographic concentrations on its capital by, for instance, analysing the effect of local economic factors such as unemployment and its impact on arrears, house prices and loan-to-value ratios.

BIPRU 2.2.53

handbook-guidance
Similarly, a building society should consider the concentration in its portfolio of certain product types that have, inherently, a more than average risk (for example, lifetime mortgages). It should, through scenario analyses in relation to its portfolio, assess the potential impact on its profitability and capital of those scenarios.

BIPRU 2.2.54

handbook-guidance
In relation to BIPRU 10 (Large exposures requirements), a bank or building society should take into account factors such as future business growth and cyclicality when it assesses the amount of capital which it will need to remain in compliance with those rules. A firm may also consider in its assessment whether any large exposures that it has identified are positively correlated.

BIPRU 2.2.55

handbook-guidance
Where a bank or building society lends to a counterparty which it assesses as representing a high credit risk, it should assess whether compliance with the rules in BIPRU in relation to credit risk is sufficient for it to manage that risk prudently.

BIPRU 2.2.56

handbook-guidance
The performance of specialised portfolios may, in some instances, depend on key individuals. This factor exacerbates concentration risk because the skill of those individuals in part limits the risk arising from a concentrated portfolio. The impact of those individuals is likely to be correspondingly greater in small firms. In developing its stress tests and scenario analyses, a bank or building society should therefore consider the impact of losing key individuals on its ability to operate normally, as well as the direct impact on its revenues.

BIPRU 2.2.57

handbook-guidance
A bank or building society should assess the sensitivity of its financial position to adverse movements in interest rates. For instance, a bank or building society should assess its sensitivity to interest rate risk arising from interest rate mismatches between assets and liabilities. A building society is exposed to interest rate risk to the extent that it borrows on a short term basis but lends over a longer period.

BIPRU 2.2.58

handbook-guidance
When assessing the adequacy of its capital, a bank or building society should not only consider the vulnerability of its revenue, but also the sensitivity of its funding and, in particular, its ability to raise additional funding in time of economic stress. A bank or building society should therefore consider whether its funding pool is sufficiently diversified. For example, where a bank is reliant solely on its parent to provide funding, its access to funds may be suddenly restricted should the parent's creditworthiness be downgraded. Similarly, a bank or building society may consider the impact of an increase in bond rates or a rating downgrade, if relevant, on its capital cost and its subsequent ability to raise capital.

BIPRU 2.2.59

handbook-guidance
A bank or building society should assess the impact of its business plans on its capital over the time horizon which it uses in its business plans. A bank or building society should assess the impact on its capital of diversifying its activities and the risk it runs of failing to manage that new business successfully. For that purpose, it may consider the cost of a price war to enter a new competitive market or the risk of mis-pricing some products as a result of not having sufficient expertise in its new area of business.

BIPRU 2.2.60

handbook-guidance
A bank or building society is also exposed to reputational risk, as its ability to underwrite new business is heavily reliant on the standing of the reputation of the firm. A bank or building society may consider the impact on its financial position of legal disputes which damage its reputation.

An asset management firm

BIPRU 2.2.61

handbook-guidance
An asset manager is primarily exposed to operational risk and reputational risk.
  • 01/01/2007

BIPRU 2.2.62

handbook-guidance

When assessing reputational risk an asset manager should consider issues such as:

  1. (1) how poor performance can affect its ability to generate profits;
  2. (2) the effect on its financial position should one or more of its key fund managers leave that firm;
  3. (3) the effect on its financial position should it lose some of its largest customers; and
  4. (4) how poor customer services can affect its financial position; for example, a firm which has outsourced the management of customer accounts may want to consider the impact on its own reputation of the service provider failing to deliver the service.
  • 01/01/2007

BIPRU 2.2.63

handbook-guidance
As an asset manager's mandates become more complex, the risk of it failing to comply fully with the terms of its contracts increases. In the event of such failure, a firm can be exposed to substantial losses resulting from customers' claims and legal actions. Although the FSA would expect an asset manager to have in place adequate controls to mitigate that risk, it may also like to consider the potential cost to it should customers claim that it has not adhered to mandates. Past claims and compensation may provide a useful benchmark for an asset manager to assess its sensitivity to future legal action. In assessing the adequacy of its capital, an asset manager may therefore consider whether it could absorb the highest operational loss it has suffered over the last 3 to 5 years.
  • 01/01/2007

BIPRU 2.2.64

handbook-guidance

In relation to the issues identified in BIPRU 2.2.63 G, an asset manager should consider, for example:

  1. (1) the direct cost to it resulting from fraud or theft;
  2. (2) the direct cost arising from customers' claims and legal action in the future; an asset manager could consider the impact on its financial position if a legal precedent were to encourage its customers to take legal action against that firm for failing to advise correctly on a certain type of product; the relevance of such scenarios is likely to depend on whether the asset manager is acting on a discretionary basis or solely as advisor; and
  3. (3) where it has obtained professional indemnity insurance, the deductibles and individual or aggregate limits on the sums insured.
  • 01/01/2007

BIPRU 2.2.65

handbook-guidance

The FSA expects an asset manager to consider the impact of economic factors on its ability to meet its liabilities as they fall due. An asset manager should therefore develop scenarios which relate to its strategic and business plan. An asset manager might therefore consider:

  1. (1) the effect of a market downturn affecting both transaction volumes and the market values of assets in its funds; in assessing the impact of such a scenario, an asset manager may consider the extent to which it can remain profitable (for example, by rapidly scaling down its activities and reducing its costs);
  2. (2) the impact on current levels of capital if it plans to undertake a significant restructuring; and
  3. (3) the impact on current levels of capital if it plans to enter a new market or launch a new product; it should assess the amount of capital it needs to hold, when operating for the first time in a market in which it lacks expertise.
  • 01/01/2007

A securities firm

BIPRU 2.2.66

handbook-guidance
  1. (1) A securities firm may consider the impact of the situations listed in (a) to (c) on its capital levels when assessing its exposure to concentration risk:
    1. (a) the potential loss that could arise from large exposures to a single counterparty;
    2. (b) the potential loss that could arise from exposures to large transactions or to a product type; and
    3. (c) the potential loss resulting from a combination of events such as a sudden increase in volatility leaving a hitherto fully-margined client unable to meet the margin calls due to the large size of the underlying position and the subsequent difficulties involved in liquidating its position.
  2. (2) An example of the analysis in (1)(b) relates to a securities firm which relies on the income generated by a large, one-off corporate finance transaction. It may want to consider the possibility of legal action arising from that transaction which prevents the payment of its fees. Additionally, an underwriting firm may, as a matter of routine, commit to place a large amount of securities. It may therefore like to assess the impact of losses arising from a failure to place the securities successfully.
  • 01/01/2007

BIPRU 2.2.67

handbook-guidance

Where a securities firm deals in illiquid securities (for example, unlisted securities or securities listed on illiquid markets), or holds illiquid assets, potentially large losses can arise from trades that have failed to settle or because of large unrealised market losses. A securities firm may therefore consider the impact of liquidity risk on its exposure to:

  1. (1) credit risk; and
  2. (2) market risk.
  • 01/01/2007

BIPRU 2.2.68

handbook-guidance

Counterparty risk rules only partially capture the risk of settlement failure as the quantification of risk is only based on mark-to-market values and does not take account of the volatility of the securities over the settlement period. A securities firm's assessment of its exposure to counterparty risk should take into account:

  1. (1) whether it acts as arranger only or whether it also executes trades;
  2. (2) the types of execution venues which it uses; for example, the London Stock Exchange or a retail service provider (RSP) have more depth than multilateral trading facilities; and
  3. (3) whether it offers extended settlements and free delivery compared to delivery versus payment business.

BIPRU 2.2.69

handbook-guidance
  1. (1) A securities firm should also consider the impact of external factors on the levels of capital it needs to hold. Scenarios covering such external factors should relate to its strategy and business plan. A securities firm might wish to consider the questions in (2) to (7).
  2. (2) Whether it plans to participate in a one-off transaction that might strain temporarily or permanently its capital.
  3. (3) Whether the unevenness of its revenue suggests that it should hold a capital buffer. Such an assessment could be based, for instance, on an analysis of past revenue and the volatility of its capital.
  4. (4) How its income might alter as interest rates fluctuate where it is obliged to pay interest to its clients in excess of interest it earns on client money deposits.
  5. (5) How its capital would be affected by a market downturn. For instance, how sensitive that firm is to a sharp reduction of trading volumes.
  6. (6) How political and economic factors will affect that firm's business. For instance, a commodity firm may wish to consider the impact of a sharp increase in prices on initial margins and, consequently, on its liquidity.
  7. (7) Whether it anticipates expanding its activities (for example, by offering clearing services), and if so, the impact on its capital.
  • 01/01/2007

BIPRU 2.2.70

handbook-guidance
A securities firm may also want to assess the impact of its internal credit limits on its levels of capital. For instance, a firm whose internal procedures authorise dealing without cash in the account or without pre-set dealing limits might consider more capital is required than if it operated stricter internal credit limits.
  • 01/01/2007

Capital models

BIPRU 2.2.71

handbook-guidance
A firm may approach its assessment of adequate capital by developing a model, including an ECM (see BIPRU 2.2.27 G), for some or all of its business risks. The assumptions required to aggregate risks modelled and the confidence levels adopted should be considered by a firm's senior management. A firm should also consider whether any relevant risks, including systems and control risks, are not captured by the model.

BIPRU 2.2.72

handbook-guidance
A firm should not expect the FSA to accept as adequate any particular model that it develops or automatically to reflect the results from the model in any individual capital guidance or capital planning buffer. However, the FSA will take into account the results of a sound and prudent model when giving individual capital guidance or when dealing with the firm in relation to its capital planning buffer (see GENPRU 1.2.19 G (Outline of provisions related to GENPRU 2.1 (Adequacy of financial resources))).

BIPRU 2.2.73

handbook-guidance

There is no prescribed approach as to how a firm should develop its internal capital model. However, a firm should be able to demonstrate:

  1. (1) the confidence levels set and whether these are linked to its corporate strategy;
  2. (2) the time horizons set for the different types of business that it undertakes;
  3. (3) the extent of historic data used and back-testing carried out;
  4. (4) that it has in place a process to verify the correctness of the model's outputs; and
  5. (5) that it has the skills and resources to operate, maintain and develop the model.

BIPRU 2.2.74

handbook-guidance

In relation to the use of an ECM (see BIPRU 2.2.27 G), the FSA is likely to place more reliance on a firm's ICAAP if the firm provides the following information:

  1. (1) a comparison of the amount of capital that the ECM generates in respect of each of the risks captured in the CRR before aggregation with the corresponding components of the CRR calculation; and
  2. (2) evidence that the guidance in BIPRU 2.2.71 G to BIPRU 2.2.78 G has been followed.

BIPRU 2.2.75

handbook-guidance
If a firm adopts a top-down approach to developing its internal model, it should be able to allocate the outcome of the internal model to risks it has previously identified in relation to each separate legal entity, business unit or business activity, as appropriate. In relation to a firm which is a member of a group, GENPRU 1.2.53 R (Application of GENPRU 1.2 on a solo and consolidated basis: Processes and tests) sets out how internal capital identified as necessary by that firm's ICAAP should be allocated.

BIPRU 2.2.76

handbook-guidance
If a firm's internal model makes explicit or implicit assumptions in relation to correlations within or between risk types, or in relation to diversification benefits between business types, the firm should be able to explain to the FSA, with the support of empirical evidence, the basis of those assumptions.

BIPRU 2.2.77

handbook-guidance
A firm's model should also reflect the past experience of both the firm and the sectors in which it operates.

BIPRU 2.2.78

handbook-guidance
The values assigned to inputs into a firm's model should be derived either stochastically, by assuming the value of an item can follow an appropriate probability distribution and by selecting appropriate values at the tail of the distribution, or deterministically, using appropriate prudent assumptions. For options or guarantees which change in value significantly in certain economic or demographic circumstances, a stochastic approach would normally be appropriate.

BIPRU 2.3

Interest rate risk in the non-trading book

  • 01/01/2007

Application

BIPRU 2.3.1

handbook-rule
This section of the Handbook applies to a BIPRU firm.

BIPRU 2.3.2

handbook-guidance
  1. (1) Interest rate risk in the non-trading book will normally be a major source of risk for:
    1. (a) a bank;
    2. (b) a building society; and
    3. (c) a BIPRU investment firm that deals on own account (including underwriting on a firm commitment basis) and whose non-trading book business equals or exceeds 15% of its total business.
  2. (2) However it will not normally be a significant risk for any other BIPRU investment firm.
  3. (3) The test in (1)(c) should be carried out in the same way as it is for the purpose of the 5% test in BIPRU 1.2.17 R (Definition of the trading book).
  4. (4) Where BIPRU 2.3 is applied on a consolidated basis (see BIPRU 2.3.13 R) the test in (1)(c) should be carried out in the same way as it is under BIPRU 8.7.24 R (Trading book size for the purposes of consolidation).

BIPRU 2.3.3

handbook-guidance

Interest rate risk in the non-trading book may arise from a number of sources for example:

  1. (1) risks related to the mismatch of repricing of assets and liabilities and off balance sheet short and long-term positions;
  2. (2) risks arising from hedging exposure to one interest rate with exposure to a rate which reprices under slightly different conditions;
  3. (3) risk related to the uncertainties of occurrence of transactions e.g. when expected future transactions do not equal the actual transactions; and
  4. (4) risks arising from consumers redeeming fixed rate products when market rates change.

Purpose

BIPRU 2.3.4

handbook-guidance
BIPRU 2.3 sets out more detail on how the systems and controls requirements in SYSC and GENPRU 1.2.30 R (Processes, strategies and systems for risks) and the requirements about stress and scenario testing in GENPRU 1.2.36 R apply to interest rate risk in the non-trading book.

BIPRU 2.3.5

handbook-guidance
BIPRU 2.3 implements Article 124(5) of the Banking Consolidation Directive.

Proportionality

BIPRU 2.3.6

handbook-guidance
The guidance on proportionality in BIPRU 2.2 applies to BIPRU 2.3.

Stress testing for interest rate risk: General requirement

BIPRU 2.3.7

handbook-rule
  1. (1) As part of its obligations under GENPRU 1.2.30 R (Processes, strategies and systems for risks) and GENPRU 1.2.36 R (Stress and scenario tests) a firm must carry out an evaluation of its exposure to the interest rate risk arising from its non-trading activities.
  2. (2) The evaluation under (1) must cover the effect of a sudden and unexpected parallel change in interest rates of 200 basis points in both directions.
  3. (3) A firm must immediately notify the FSA if any evaluation under this rule suggests that, as a result of the change in interest rates described in (2), the economic value of the firm would decline by more than 20% of its capital resources.

BIPRU 2.3.8

handbook-guidance
A firm should, under BIPRU 2.3.7 R (2), apply a 200 basis point shock to each major currency exposure.

BIPRU 2.3.9

handbook-guidance

For a larger and/or more complex firm, appropriate systems to evaluate and manage interest rate risk in the non-trading book should include:

  1. (1) the ability to measure the exposure and sensitivity of the firm's activities, if material, to repricing risk, yield curve risk, basis risk and risks arising from embedded optionality (for example, pipeline risk, prepayment risk) as well as changes in assumptions (for example those about customer behaviour);
  2. (2) consideration as to whether a purely static analysis of the impact on their current portfolio of a given shock or shocks should be supplemented by a more dynamic simulation approach; and
  3. (3) scenarios in which different interest rate paths are computed and in which some of the assumptions (e.g. about behaviour, contribution to risk and balance sheet size and composition) are themselves functions of interest rate level.

BIPRU 2.3.10

handbook-guidance

Under GENPRU 1.2.60 R, a firm is required to make a written record of its assessments made under GENPRU 1.2. A firm's record of its approach to evaluating and managing interest rate risk as it affects the firm's non-trading activities should cover the following issues:

  1. (1) the internal definition of and boundary between "banking book" and "trading activities" (see BIPRU 1.2);
  2. (2) the definition of economic value and its consistency with the method used to value assets and liabilities (e.g. discounted cashflows);
  3. (3) the size and the form of the different shocks to be used for internal calculations;
  4. (4) the use of a dynamic and / or static approach in the application of interest rate shocks;
  5. (5) the treatment of commonly called "pipeline transactions" (including any related hedging);
  6. (6) the aggregation of multicurrency interest rate exposures;
  7. (7) the inclusion (or not) of non-interest bearing assets and liabilities (including capital and reserves);
  8. (8) the treatment of current and savings accounts (i.e. the maturity attached to exposures without a contractual maturity);
  9. (9) the treatment of fixed rate assets (liabilities) where customers still have a right to repay (withdraw) early;
  10. (10) the extent to which sensitivities to small shocks can be scaled up on a linear basis without material loss of accuracy (i.e. covering both convexity generally and the non-linearity of pay-off associated with explicit option products);
  11. (11) the degree of granularity employed (for example offsets within a time bucket); and
  12. (12) whether all future cash flows or only principal balances are included.

BIPRU 2.3.11

handbook-guidance
The FSA will periodically review whether the level of the shock referred to in BIPRU 2.3.7 R (2) is appropriate in the light of changing circumstances, in particular the general level of interest rates (for instance periods of very low interest rates) and their volatility. A firm's internal systems should therefore be flexible enough to compute its sensitivity to any standardised shock that is prescribed. If a 200 basis point shock would imply negative interest rates or if such a shock would otherwise be considered inappropriate, the FSA will consider adjusting the requirements accordingly.

Stress testing for interest rate risk: Frequency

BIPRU 2.3.12

handbook-rule
  1. (1) A firm must carry out the evaluations required by BIPRU 2.3.7 R as frequently as necessary for it to be reasonably satisfied that it has at all times a sufficient understanding of the degree to which it is exposed to the risks referred to in that rule and the nature of that exposure. In any case it must carry out those evaluations no less frequently than required by (2) or (3).
  2. (2) The minimum frequency of the evaluation in BIPRU 2.3.7 R (1) is once each year.
  3. (3) The minimum frequency of the evaluation in BIPRU 2.3.7 R (2) is once each quarter.

Consolidation

BIPRU 2.3.13

handbook-rule
GENPRU 1.2.45 R to GENPRU 1.2.59 R (Application of GENPRU 1.2 on a solo and consolidated basis) apply to BIPRU 2.3 as they apply to GENPRU 1.2.30 R and GENPRU 1.2.36 R.

Export chapter as

BIPRU 3

Standardised credit risk

BIPRU 3.1

Application and purpose

  • 01/01/2007

Application

BIPRU 3.1.1

handbook-rule
BIPRU 3 applies to a BIPRU firm.

Purpose

BIPRU 3.1.2

handbook-guidance

BIPRU 3 implements:

  1. (1) Articles 78 to 80, paragraph (1) of Article 81, Article 83, Annex II and Parts 1 and 3 of Annex VI of the Banking Consolidation Directive;
  2. (2) Article 18 of the Capital Adequacy Directive so far as it applies Articles 78 to 80, paragraph (1) of Article 81, Article 83 and Parts 1 and 3 of Annex VI of the Banking Consolidation Directive to investment firms; and
  3. (3) Article 40 of the Capital Adequacy Directive for the purposes of the calculation of credit risk under the Banking Consolidation Directive.

BIPRU 3.1.3

handbook-guidance
BIPRU 3.1 sets out how a firm should calculate the credit risk capital component, which is one of the elements that make up the credit risk capital requirement under GENPRU 2.1.51 R. Part of that calculation involves calculating risk weighted exposure amounts for exposures in the firm's non-trading book. The rest of BIPRU 3 sets out how the firm should carry out that calculation.

BIPRU 3.1.4

handbook-guidance
BIPRU 5 deals with the effect of credit risk mitigation on the calculation of risk weighted exposure amounts. BIPRU 13 deals with the calculation of exposure values for certain kinds of products. BIPRU 14.3 deals with the calculation of the counterparty risk capital component for unsettled transactions in the trading book and non-trading book. BIPRU 14.4 deals with capital resources with respect to free deliveries.

Calculation of the credit risk capital component

BIPRU 3.1.5

handbook-rule
The credit risk capital component of a firm is 8% of the total of its risk weighted exposure amounts for exposures falling into BIPRU 3.1.6 R, calculated in accordance with BIPRU 3.

BIPRU 3.1.6

handbook-rule

An exposure falls into this rule if:

  1. (1) it is in a firm's non-trading book; and
  2. (2) it has not been deducted from the firm's capital resources under GENPRU 2.2.

BIPRU 3.2

The central principles of the standardised approach to credit risk

  • 01/01/2007

BIPRU 3.2.1

handbook-rule

Subject to BIPRU 13:

  1. (1) the exposure value of an asset item must be its balance-sheet value, subject to any value adjustments required by GENPRU 1.3; and
  2. (2) the exposure value of an off-balance sheet item listed in the table in BIPRU 3.7.2 R must be the percentage of its value set out in that table.

[Note: BCD Article 78(1) part]

BIPRU 3.2.2

handbook-rule

The off-balance sheet items listed in the table in BIPRU 3.7.2 R must be assigned to the risk categories as indicated in that table.

BIPRU 3.2.3

handbook-rule

Where an exposure is subject to funded credit protection, a firm may modify the exposure value applicable to that item in accordance with BIPRU 5.

BIPRU 3.2.4

handbook-guidance

BIPRU 13 sets out the method for determination of the exposure value of a financial derivative instrument, with the effects of contracts of novation and other netting agreements taken into account for the purposes of that method in accordance with BIPRU 13.7.

BIPRU 3.2.5

handbook-guidance

BIPRU 13.3 and BIPRU 13.8 set out the provisions applying to the treatment and determination of the exposure value of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions (SFTs).

[Note: reference to BCD Article 78(2) second sentence. Implementation in BIPRU 13]

BIPRU 3.2.6

handbook-guidance
BIPRU 13 also sets out the methods for the determination of exposure values for long settlement transactions.

BIPRU 3.2.7

handbook-guidance

BIPRU 13.8 provides that, in the case of a firm using the financial collateral comprehensive method under BIPRU 5, where an exposure takes the form of an SFT, the exposure value should be increased by the volatility adjustment appropriate to such securities or commodities set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R (Supervisory volatility adjustments approach and the own estimates of volatility adjustments approach).

BIPRU 3.2.8

handbook-guidance

BIPRU 13.3.13 R and BIPRU 13.8.8 R set out the provisions relating to determination of the exposure value of certain credit risk exposures outstanding with a central counterparty, where the central counterparty credit risk exposures with all participants in its arrangements are fully collateralised on a daily basis.

Exposure Classes

BIPRU 3.2.9

handbook-rule

A firm must assign each exposure to one of the following exposure classes:

  1. (1) claims or contingent claims on central governments or central banks;
  2. (2) claims or contingent claims on regional governments or local authorities;
  3. (3) claims or contingent claims on administrative bodies and non-commercial undertakings;
  4. (4) claims or contingent claims on multilateral development banks;
  5. (5) claims or contingent claims on international organisation;
  6. (6) claims or contingent claims on institutions;
  7. (7) claims or contingent claims on corporates;
  8. (8) retail claims or contingent retail claims;
  9. (9) claims or contingent claims secured on real estate property;
  10. (10) past due items;
  11. (11) items belonging to regulatory high-risk categories;
  12. (12) claims in the form of covered bonds;
  13. (13) securitisation positions;
  14. (14) short-term claims on institutions and corporates;
  15. (15) claims in the form of CIUs; or
  16. (16) other items.

[Note: BCD Article 79(1)]

BIPRU 3.2.10

handbook-rule

To be eligible for the retail exposure class, an exposure must meet the following conditions:

  1. (1) the exposure must be either to an individual person or persons, or to a small or medium sized entity;
  2. (2) the exposure must be one of a significant number of exposures with similar characteristics such that the risks associated with such lending are substantially reduced; and
  3. (3) the total amount owed to the firm, its parent undertakings and its subsidiary undertakings, including any past due exposure, by the obligor client or group of connected clients, but excluding claims or contingent claims secured on residential real estate collateral, must not, to the knowledge of the firm, exceed €1 million.

[Note: BCD Article 79(2)]

BIPRU 3.2.11

handbook-rule

A firm must take reasonable steps to acquire the knowledge referred to in BIPRU 3.2.10 R (3).

BIPRU 3.2.12

handbook-rule

Securities are not eligible for the retail exposure class.

BIPRU 3.2.13

handbook-rule

The present value of retail minimum lease payments is eligible for the retail exposure class.

Retail exposures: Significance

BIPRU 3.2.14

handbook-guidance
A key driver of the preferential risk weight afforded retail exposures is the lower correlation and systematic risk associated with such exposures. This aspect is unrelated to the absolute number of retail exposures. Accordingly in defining what constitutes a significant number of retail exposures for the purpose of BIPRU 3.2.10 R (2), a firm need only satisfy itself that the number of retail exposures is sufficiently large to diversify away idiosyncratic risk. This assessment will be subject to supervisory review and part of a firm's SREP. It will be looked at as one of the issues relating to overall diversification.

Retail exposures: Aggregation: Reasonable steps

BIPRU 3.2.15

handbook-guidance
In deciding what steps are reasonable for the purposes of BIPRU 3.2.11 R, a firm may take into account complexity and cost, as well as the materiality of the impact upon its capital calculation. A firm should be able to demonstrate to the FSA that it has complied with the obligation to take reasonable steps under BIPRU 3.2.11 R in the way it takes these factors into account.

Retail exposures: Aggregation: Single risk

BIPRU 3.2.16

handbook-guidance
  1. (1) The definition of group of connected clients is set out in the Glossary. Paragraph (2) of that definition is "two or more persons ... who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties".
  2. (2) Say that a firm has exposures to A and B. When deciding whether A and B come within paragraph (2) of the definition two conditions should be satisfied. Firstly the connections between A and B should mean that if A experiences financial problems, B should be likely to encounter repayment difficulties. Secondly, the connections between A and B should mean that if B experiences financial problems, A should be likely to encounter repayment difficulties.
  3. (3) The guidance in BIPRU 3.2.16 G is provided for the purpose of BIPRU 3.2.10 R only and not for the purposes of any other provision in the Handbook that uses the defined term group of connected clients.

Retail exposures: Aggregation: Personal and business exposures

BIPRU 3.2.17

handbook-guidance
If a firm has exposures to an owner of a retail SME in his personal capacity and exposures to the retail SME the firm should aggregate the two types of exposure for the purpose of BIPRU 3.2.10 R (3), although it should not include claims secured on residential real estate collateral. In deciding what steps are reasonable for the purposes of BIPRU 3.2.11 R in aggregating these two types of exposure, a firm may take into account the materiality of those personal exposures. A firm should be able to demonstrate to the FSA that it has complied with the obligation to take reasonable steps under BIPRU 3.2.11 R when taking into account materiality in this way.

Retail exposures: Exchange rate

BIPRU 3.2.18

handbook-guidance
Where an exposure is denominated in a currency other than the euro, a firm may calculate the euro equivalent for purposes of BIPRU 3.2.10 R using any appropriate set of exchange rates provided its choice has no obvious bias and that the firm is consistent in its approach to choosing rates.

Retail exposures: Frequency of monitoring

BIPRU 3.2.19

handbook-guidance
A firm may monitor compliance with the €1m threshold in BIPRU 3.2.10 R on the basis of approved limits provided it has internal control procedures that are sufficient to ensure that amounts owed cannot diverge from approved limits to such an extent as to give rise to a material breach of the €1m threshold.

BIPRU 3.2.20

handbook-rule
  1. (1) To calculate risk weighted exposure amounts, risk weights must be applied to all exposures, unless deducted from capital resources, in accordance with the provisions of BIPRU 3.4.
  2. (2) The application of risk weights must be based on the standardised credit risk exposure class to which the exposure is assigned and, to the extent specified in BIPRU 3.4, its credit quality.
  3. (3) Credit quality may be determined by reference to:
    1. (a) the credit assessments of eligible ECAIs in accordance with the provisions of BIPRU 3; or
    2. (b) the credit assessments of export credit agencies as described in BIPRU 3.4.

[Note: BCD Article 80(1)]

BIPRU 3.2.21

handbook-rule

For the purposes of applying a risk weight, as referred to in BIPRU 3.2.20 R, the exposure value must be multiplied by the risk weight specified or determined in accordance with the standardised approach.

BIPRU 3.2.22

handbook-rule

Notwithstanding BIPRU 3.2.20 R, where an exposure is subject to credit protection the risk weight applicable to that item may be modified in accordance with BIPRU 5.

BIPRU 3.2.23

handbook-rule

Risk weighted exposure amounts for securitised exposures must be calculated in accordance with BIPRU 9.

BIPRU 3.2.24

handbook-rule

Exposures the calculation of risk weighted exposure amounts for which is not otherwise provided for under the standardised approach must be assigned a risk weight of 100%.

Zero risk-weighting for intra-group exposures: core UK group

BIPRU 3.2.25

handbook-rule
  1. (1) Subject to BIPRU 3.2.35 R, and with the exception of exposures giving rise to liabilities in the form of the items referred to in BIPRU 3.2.26 R, a firm is not required to comply with BIPRU 3.2.20 R (Calculation of risk weighted exposures amounts under the standardised approach) in the case of the exposures of the firm to a counterparty which is its parent undertaking, its subsidiary undertaking or a subsidiary undertaking of its parent undertaking provided that the following conditions are met:
    1. (a) the counterparty is
      1. (i) a core concentration risk group counterparty; and
      2. (ii) an institution, financial holding company, financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements;
    2. (b) [deleted]
    3. (ba) (in relation to a subsidiary undertaking) 100% of the voting rights attaching to the shares in the counterparty's capital is held by the firm or a financial holding company (or a subsidiary undertaking of the financial holding company), whether individually or jointly, and that the firm or financial holding company (or its subsidiary undertaking) must have the right to appoint or remove a majority of the members of the board of directors, committee of management or other governing body of the counterparty;
    4. (c) the counterparty is subject to the same risk evaluation, measurement and control procedures as the firm;
    5. (d) the counterparty is incorporated in the United Kingdom; and
    6. (e) there is no current or foreseen material practical or legal impediment to the prompt transfer of capital resources or repayment of liabilities from the counterparty to the firm.
  2. (2) Where a firm chooses under (1) not to apply BIPRU 3.2.20 R, it must assign a risk weight of 0% to the exposure.
  3. (3) A firm need not apply the treatment in (1) and (2) to every exposure that is eligible for that treatment.

[Note: BCD Article 80(7)]

BIPRU 3.2.25A

handbook-guidance
  1. (1) Firms are referred to BIPRU 10.8A (Intra-group exposures: core UK group) under which exposures within the core UK group are exempt from the limits described in BIPRU 10.5 (Limits on exposures) if they would be assigned a risk weight of 0% under BIPRU 3.2.25 R.
  2. (2) Therefore, a firm that is applying for a core UK group waiver should demonstrate that it meets the conditions in BIPRU 3.2.25 R and BIPRU 10.8A for establishing a core UK group. A firm that is granted a core UK group waiver may rely on it for the purpose of assigning a risk weight of 0% to exposures within its core UK group and for the purpose of exempting the exposures within the core UK group from the 25% large exposure limit.

BIPRU 3.2.26

handbook-rule

A firm must not apply the treatment in BIPRU 3.2.25 R to exposures giving rise to liabilities in the form of any of the following items:

  1. (1) in the case of a BIPRU firm, any tier one capital or tier two capital; and
  2. (2) in the case of any other undertaking, any item that would be tier one capital or tier two capital if the undertaking were a BIPRU firm.

[Note: BCD Article 80(7), part]

BIPRU 3.2.27

handbook-rule
  1. (1) [deleted]
    1. (a) [deleted]
    2. (b) [deleted]
    3. (c) [deleted]
  2. (2) [deleted]

BIPRU 3.2.27A

handbook-rule
  1. (1) For the purpose of BIPRU 3.2.25R (1)(e), a firm must be able on an ongoing basis to demonstrate fully to the FSA the circumstances and arrangements, including legal arrangements, by virtue of which there are no material practical or legal impediments, and none are foreseen, to the prompt transfer of capital resources or repayment of liabilities from the counterparty to the firm.
  2. (2) In relation to a counterparty that is not a firm, the arrangements referred to in (1) must include a legally binding agreement with each firm that is a member of the core UK group that it will promptly on demand by the firm increase the firm's capital resources by an amount required to ensure that the firm complies with GENPRU 2.1 (Calculation of capital resources requirements), BIPRU 10 (Large exposures) and any other requirements relating to capital resources or concentration risk imposed on a firm by or under the regulatory system.

BIPRU 3.2.28

handbook-guidance
For the purpose of BIPRU 3.2.25 R (1)(c) it is the risk management functions of the group that should be integrated, rather than the group's operational management. A firm should ensure that if risk management functions are integrated in this way it should be possible for the FSA to undertake qualitative supervision of the management of the integrated risk management function.

BIPRU 3.2.29

handbook-guidance
In relation to a core concentration risk group counterparty, an undertaking is included within the scope of consolidation of a group on a full basis if it is at the head of the group or if its assets and liabilities are taken into account in full as referred to in BIPRU 8.5.2 G (Basis of inclusion of undertakings in consolidation).

BIPRU 3.2.29A

handbook-guidance
  1. (1) In relation to BIPRU 3.2.25 R (1)(ba), a subsidiary undertaking should generally be 100% owned and controlled by a single shareholder. However, if a subsidiary undertaking has more than one shareholder, that undertaking may be a member of the core UK group if all its shareholders are also members of the same core UK group.
  2. (2) For the purpose of BIPRU 3.2.25R (1)(d) (Incorporation in the UK), if a counterparty is of a type that falls within the scope of the Council Regulation of 29 May 2000 on insolvency proceedings (Regulation 1346/2000/EC) and it is established in the United Kingdom other than by incorporation, a firm wishing to include that counterparty in its core UK group may apply to the FSA for a waiver of this condition if it can demonstrate fully to the FSA that the counterparty's centre of main interests is situated in the United Kingdom within the meaning of that Regulation.

BIPRU 3.2.30

handbook-guidance

For the purpose of BIPRU 3.2.25R (1)(e) (Prompt transfer of capital resources):

  1. (1) in the case of an undertaking that is a firm the requirement in BIPRU 3.2.25R (1)(e) for the prompt transfer of capital resources refers to capital resources in excess of the capital and financial resources requirements to which it is subject under the regulatory system; and
  2. (2) the following guidance relating to the condition in BIPRU 10.8A.2 R (6) requiring the prompt transfer of capital resources within a core UK group as applicable for the exemption from large exposure limits is also relevant:
    1. (a) BIPRU 10.8A.6 G in respect of the criteria that the FSA will consider when assessing whether the condition requiring the prompt transfer of capital resources is going to be met; and
    2. (b) BIPRU 10.8A.7 G (2) in respect of the counterparty's obligation to increase the firm's capital resources and the limitations that may be permitted.

BIPRU 3.2.31

handbook-guidance
The requirement in BIPRU 3.2.25 R (1)(e) for the prompt repayment of liabilities refers to the prompt repayment of liabilities when due.

BIPRU 3.2.32

handbook-guidance
The guidance in BIPRU 3.2.30 G - BIPRU 3.2.31 G does not apply to BIPRU 2.1 (Solo consolidation) even though the provisions have similar wording. This is because the purpose of the provisions in BIPRU 2.1 is to define the conditions under which two undertakings should be treated as a single undertaking. The purpose of BIPRU 3.2.25 R (1) is to define the circumstances in which it is appropriate to apply a zero risk weight.

BIPRU 3.2.33

handbook-guidance
A firm that has chosen to apply the treatment in BIPRU 3.2.25 R should monitor the exposures to which a 0% risk weight is applied under that treatment and report these to the FSA as required.

BIPRU 3.2.34

handbook-guidance
If a firm has an IRB permission and exposures are exempted from the IRB approach under BIPRU 4.2.26 R (6) the firm may apply a 0% risk weight to them under BIPRU 3.2.25 R (2) (Zero risk weighting for intra-group exposures) if the conditions in BIPRU 3.2.25 R (1) are satisfied.

BIPRU 3.2.35

handbook-rule
  1. (1) A firm may not apply BIPRU 3.2.25 R unless it has a core UK group waiver.
  2. (2) [deleted]
  3. (3) A firm may stop applying BIPRU 3.2.25 R or may stop applying it to some exposures.
  4. (4) [deleted]
  5. (5) A firm must notify the FSA if it becomes aware that any exposure that it has treated as exempt under BIPRU 3.2.25 R has ceased to meet the conditions for exemption or if the firm ceases to treat an exposure under that rule.

BIPRU 3.2.37

handbook-guidance
BIPRU 3 Annex 1 G is a flow chart guide to assessing whether an intra-group exposure can be zero risk weighted using the standardised approach subject to the conditions set out in BIPRU 3.2.25 R - BIPRU 3.2.35 R.

Exposures to recognized third-country investment firms, clearing houses and investment exchanges

BIPRU 3.2.38

handbook-rule

For the purposes of the standardised approach (including as it applies for the purposes of BIPRU 14) and without prejudice to BIPRU 13.3.13 R and BIPRU 13.8.8 R (Exposure to a central counterparty), exposures to recognised third country investment firms and exposures to recognised clearing houses, designated clearing houses, recognised investment exchanges and designated investment exchanges must be treated as exposures to institutions.

[Note: CAD Article 40]

BIPRU 3.3

The use of the credit assessments of ratings agencies

  • 01/01/2007

BIPRU 3.3.1

handbook-rule

An external credit assessment may be used to determine the risk weight of an exposure in accordance with BIPRU 3.2.20 R to BIPRU 3.2.26 R only if the ECAI which provides it is recognised by the FSA as an eligible ECAI for the purposes of the standardised approach to credit risk.

Recognition of ratings agencies

BIPRU 3.3.2

handbook-guidance
The FSA will recognise an ECAI as an eligible ECAI for the purposes of BIPRU 3, or will refuse to recognise an ECAI or will revoke its recognition of an ECAI as an eligible ECAI in accordance with the Capital Requirements Regulations 2006.

BIPRU 3.3.3

handbook-guidance
Regulation 22 of the Capital Requirements Regulations 2006 deals with recognition by the FSA of eligible ECAIs for exposure risk weight purposes. Regulation 25 deals with revoking recognition.

BIPRU 3.3.4

handbook-guidance
The criteria which the FSA must apply when assessing ECAIs for recognition for exposure risk weighting purposes are set out in Regulation 22 and Schedule 1 to the Capital Requirements Regulations 2006. In making an assessment against those criteria and in carrying out the mapping process described in BIPRU 3.3.7 G to BIPRU 3.3.9 G the FSA will have regard to the approach set out in the Committee of European Banking Supervisors' "Guidelines on the recognition of External Credit Assessment Institutions" dated 20 January 2006. The FSA does not expect to recognise an ECAI unless the information set out in those guidelines has been submitted to it.

BIPRU 3.3.5

handbook-guidance
The list of eligible ECAIs is published on the FSA website. When the FSA recognises an ECAI as an eligible ECAI, it publishes that decision by amending the list of eligible ECAIs on the FSA website to include the name of the eligible ECAI. When the FSA determines that the recognition of an ECAI should be revoked, it publishes that decision by deleting the name of the ECAI from the list on the FSA website

BIPRU 3.3.6

handbook-guidance
The list of eligible ECAIs includes those who have been recognised as eligible for exposure risk weighting purposes by a competent authority of another EEA State and are subsequently recognised as eligible ECAIs by the FSA without carrying out its own evaluation process under Regulation 22(2) of the Capital Requirements Regulations 2006.

Mapping of credit assessments

BIPRU 3.3.7

handbook-guidance
Under Regulation 22(3) of the Capital Requirements Regulations 2006 the FSA is obliged to determine, taking into account the requirements set out in Schedule 2 to the Capital Requirements Regulations 2006, with which of the credit quality steps set out in Part 1 of Annex VI of the Banking Consolidation Directive the relevant credit assessments of an eligible ECAI are to be associated. Those determinations should be objective and consistent.

BIPRU 3.3.8

handbook-rule
The credit quality step with which a relevant credit assessment of an eligible ECAI is to be associated is that in the table mapping the credit assessments of eligible ECAIs to credit quality steps published by the FSA under Regulation 22(3) of the Capital Requirements Regulations 2006.

BIPRU 3.3.9

handbook-guidance

The table mapping the credit assessments of eligible ECAIs to credit quality steps is published on the FSA website and amended from time to time in line with additions to and deletions from the list of eligible ECAIs. The table includes mappings made by a competent authority of another EEA State which are subsequently recognised by the FSA without carrying out its own determination process under Regulation 22(5) of the Capital Requirements Regulations 2006.

BIPRU 3.4

Risk weights under the standardised approach to credit risk

  • 01/01/2007

Risk weights: Exposures to central governments or central banks: Treatment

BIPRU 3.4.1

handbook-rule

Without prejudice to BIPRU 3.4.2 R to BIPRU 3.4.9 R, exposures to central governments and central banks must be assigned a 100% risk weight.

BIPRU 3.4.2

handbook-rule

Subject to BIPRU 3.4.4 R, exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.3 R in accordance with the assignment by the FSA in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.

Table: Exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available

BIPRU 3.4.3

handbook-rule
This table belongs to BIPRU 3.4.2 R.

BIPRU 3.4.4

handbook-rule

Exposures to the European Central Bank must be assigned a 0% risk weight.

Exposures in the national currency of the borrower

BIPRU 3.4.5

handbook-rule

Exposures to EEA States' central governments and central banks denominated and funded in the domestic currency of that central government and central bank must be assigned a risk weight of 0%.

BIPRU 3.4.6

handbook-rule

When the competent authorities of a third country which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA assign a risk weight which is lower than that indicated in BIPRU 3.4.1 R to BIPRU 3.4.3 R to exposures to their central government and central bank denominated and funded in the domestic currency, a firm may risk weight such exposures in the same manner.

Use of credit assessments by export credit agencies

BIPRU 3.4.7

handbook-rule

An export credit agency credit assessment may be recognised by a firm for the purpose of determining the risk weight to be applied to an exposure under the standardised approach if either of the following conditions is met:

  1. (1) the credit assessment is a consensus risk score from export credit agencies participating in the OECD "Arrangement on Guidelines for Officially Supported Export Credits"; or
  2. (2) the export credit agency publishes its credit assessments, and the export credit agency subscribes to the OECD agreed methodology, and the credit assessment is associated with one of the eight minimum export insurance premiums (MEIP) that the OECD agreed methodology establishes.

[Note: BCD Annex VI Part 1 point 6]

BIPRU 3.4.8

handbook-rule

Exposures for which a credit assessment by an export credit agency is recognised for risk weighting purposes must be assigned a risk weight according to the table in BIPRU 3.4.9 R.

Table: Exposure for which a credit assessment by an export credit agency is recognised

BIPRU 3.4.9

handbook-rule
This table belongs to BIPRU 3.4.8 R.

Exposures to regional governments or local authorities: General

BIPRU 3.4.10

handbook-rule

Without prejudice to BIPRU 3.4.15 R to BIPRU 3.4.19 R:

  1. (1) a firm must risk weight exposures to regional governments and local authorities in accordance with BIPRU 3.4.11 R to BIPRU 3.4.14 R and BIPRU 3.4.19A R; and
  2. (2) the preferential treatment for short-term exposures specified in BIPRU 3.4.37 R, BIPRU 3.4.39 R and BIPRU 3.4.44 R must not be applied.

[Note: BCD Annex VI Part 1 point 8]

Exposures to regional governments or local authorities: Central government risk weight based method

BIPRU 3.4.11

handbook-rule
  1. (1) Exposures to regional governments and local authorities must be assigned a risk weight according to the credit quality step to which exposures to the central government of the jurisdiction in which the regional government or local authority is established are assigned in accordance with the table in BIPRU 3.4.12 R.
  2. (2) Exposures to an unrated regional government or local authority must not be assigned a risk weight lower than that applied to exposures to its central government.

[Note: BCD Annex VI Part 1 points 25 and 26]

Table: Central government risk weight based method

BIPRU 3.4.12

handbook-rule
This table belongs to BIPRU 3.4.11 R.

BIPRU 3.4.13

handbook-rule

For exposures to regional governments and local authorities established in countries where the central government is unrated, the risk weight must be not more than 100%.

BIPRU 3.4.14

handbook-rule

For exposures to regional governments and local authorities with an original effective maturity of three months or less, the risk weight must be 20%.

[Note: BCD Annex VI Part 1 point 28]

BIPRU 3.4.15

handbook-rule

A firm must treat an exposure to a regional government or local authority of the United Kingdom listed in BIPRU 3 Annex 2 R as an exposure to the central government of the United Kingdom.

BIPRU 3.4.16

handbook-guidance

The FSA will include a regional government or local authority in the list in BIPRU 3 Annex 2 R where there is no difference in risk between exposures to that body and exposures to the central government of the United Kingdom because of the specific revenue-raising powers of the regional government or local authority, and the existence of specific institutional arrangements the effect of which is to reduce the risk of default.

[Note: BCD Annex VI Part 1 point 9]

BIPRU 3.4.17

handbook-rule

A firm must treat an exposure to a regional government or local authority of an EEA State other than the United Kingdom as an exposure to the central government in whose jurisdiction that regional government or local authority is established if that regional government or local authority is included on the list of regional governments and local authorities drawn up by the competent authority in that EEA State under a CRD implementation measure with respect to point 9 of Part 1 of Annex VI of the Banking Consolidation Directive.

[Note: BCD Annex VI Part 1 point 9]

BIPRU 3.4.18

handbook-rule

Exposures to churches or religious communities constituted in the form of a legal person under public law must, in so far as they raise taxes in accordance with legislation conferring on them the right to do so, be treated as exposures to regional governments and local authorities, except that BIPRU 3.4.15 R and BIPRU 3.4.17 R do not apply.

[Note: BCD Annex VI Part 1 point 10]

BIPRU 3.4.19

handbook-rule

When competent authorities of a third country jurisdiction which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA treat exposures to regional governments and local authorities as exposures to their central government, a firm may risk weight exposures to such regional governments and local authorities in the same manner.

BIPRU 3.4.19A

handbook-rule

Without prejudice to BIPRU 3.4.17 R to BIPRU 3.4.19 R, an exposure to a regional government or local authority of an EEA State denominated and funded in the domestic currency of that regional government or local authority must be assigned a risk weight of 20%.

[Note: BCD Annex VI Part 2(b)]

Exposures to administrative bodies and non-commercial undertakings

BIPRU 3.4.20

handbook-rule
BIPRU 3.4.21 R to BIPRU 3.4.26 R set out the provisions applying to exposures to administrative bodies and non-commercial undertakings.

Treatment

BIPRU 3.4.21

handbook-rule

Without prejudice to BIPRU 3.4.22 R to BIPRU 3.4.26 R, exposures to administrative bodies and non-commercial undertakings must be assigned a 100% risk weight.

[Note: BCD Annex VI Part 1 point 12]

Public sector entities

BIPRU 3.4.22

handbook-rule

Without prejudice to BIPRU 3.4.23 R to BIPRU 3.4.26 R, exposures to public sector entities must be assigned a 100% risk weight.

[Note: BCD Annex VI Part 1 point 13]

BIPRU 3.4.23

handbook-rule

A firm may treat an exposure to a public sector entity as an exposure to a regional government or local authority in accordance with BIPRU 3.4.11 R to BIPRU 3.4.14 R.

BIPRU 3.4.24

handbook-rule

In exceptional circumstances a firm may treat an exposure to a public sector entity established in the United Kingdom as an exposure to the central government of the United Kingdom if there is no difference in risk between exposures to that body and exposures to the central government of the United Kingdom because of the existence of an appropriate guarantee by the central government.

[Note: BCD Annex VI Part 1 point 15]

BIPRU 3.4.25

handbook-rule

Where a competent authority of another EEA State implements points 14 or 15 of Part 1 of Annex VI of the Banking Consolidation Directive by exercising the discretion to treat exposures to public sector entities as exposures to institutions or as exposures to the central government of the EEA State concerned, a firm may risk weight exposures to the relevant public sector entities in the same manner.

[Note: BCD Annex VI Part 1 point 16]

BIPRU 3.4.26

handbook-rule

When competent authorities of a third country jurisdiction, which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA, treat exposures to public sector entities as exposures to institutions, a firm may risk weight exposures to the relevant public sector entities in the same manner.

[Note: BCD Annex VI Part 1 point 17]

Exposures to multilateral development banks: Treatment

BIPRU 3.4.27

handbook-rule

Without prejudice to BIPRU 3.4.28 R to BIPRU 3.4.29 R:

  1. (1) a firm must treat exposures to multilateral development banks in the same manner as exposures to institutions in accordance with BIPRU 3.4.34 R to BIPRU 3.4.39 R (Exposures to institutions: credit assessment based method); and
  2. (2) the preferential treatment for short-term exposures specified in BIPRU 3.4.37 R, BIPRU 3.4.39 R and BIPRU 3.4.44 R must not be applied.

[Note: BCD Annex VI Part 1 point 19]

BIPRU 3.4.28

handbook-rule

An exposure to a multilateral development bank listed in point (1) of the definition in the Glossary must be assigned a 0% risk weight.

[Note: BCD Annex VI Part 1 point 20]

BIPRU 3.4.29

handbook-rule

A risk weight of 20% must be assigned to the portion of unpaid capital subscribed to the European Investment Fund.

Exposures to international organisations

BIPRU 3.4.30

handbook-rule

Exposures to the following international organisations must be assigned a 0% risk weight:

  1. (1) the EU;
  2. (2) the International Monetary Fund; and
  3. (3) the Bank for International Settlements.

[Note: BCD Annex VI Part 1 point 22]

Exposures to institutions: General

BIPRU 3.4.31

handbook-rule
BIPRU 3.4.32 R to BIPRU 3.4.48 R set out the treatment to be accorded to exposures to institutions.

Exposures to institutions: Treatment

BIPRU 3.4.32

handbook-rule

Without prejudice to BIPRU 3.4.33 R to BIPRU 3.4.47 R, exposures to financial institutions authorised and supervised by the competent authorities responsible for the authorisation and supervision of credit institutions and subject to prudential requirements equivalent to those applied to credit institutions must be risk weighted as exposures to institutions.

Exposures to institutions: Risk weight floor on exposures to unrated institutions

BIPRU 3.4.33

handbook-rule

Exposures to an unrated institution must not be assigned a risk weight lower than that applied to exposures to its central government.

Exposures to institutions: Credit assessment based method

BIPRU 3.4.34

handbook-rule

Exposures to institutions with a residual maturity of more than three months for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.35 R in accordance with the assignment by the FSA in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.

Table: Exposures to institutions with a residual maturity of more than three months for which a credit assessment by a nominated ECAI is available

BIPRU 3.4.35

handbook-rule
This table belongs to BIPRU 3.4.34 R.

BIPRU 3.4.36

handbook-rule

Without prejudice to BIPRU 3.4.33 R, exposures to unrated institutions must be assigned a risk weight of 50%.

[Note: BCD Annex VI Part 1 point 30]

BIPRU 3.4.37

handbook-rule

Exposures to an institution with a residual maturity of three months or less for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.38 R in accordance with the assignment by the FSA in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.

Table: Exposures to an institution with a residual maturity of three months or less for which a credit assessment by a nominated ECAI is available

BIPRU 3.4.38

handbook-rule
This table belongs to BIPRU 3.4.37 R.

BIPRU 3.4.39

handbook-rule

Without prejudice to BIPRU 3.4.33 R, exposures to unrated institutions having an original effective maturity of three months or less must be assigned a 20% risk weight

Exposures to institutions: Interaction with short-term credit assessments

BIPRU 3.4.40

handbook-rule

If there is no short-term credit assessment as set out in BIPRU 3.4.112 R, the general preferential treatment for short-term exposures as specified in BIPRU 3.4.37 R applies to all exposures to institutions of up to three months residual maturity.

BIPRU 3.4.41

handbook-rule

If there is a short-term credit assessment as set out in BIPRU 3.4.112 R and such an assessment determines the application of a more favourable or identical risk weight than the use of the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R, then the short-term assessment and risk weighting specified in BIPRU 3.4.112 R must be used for that specific exposure only. Other short-term exposures must follow the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R.

[Note: BCD Annex VI Part 1 point 35]

BIPRU 3.4.42

handbook-rule

If there is a short-term credit assessment as set out in BIPRU 3.4.112 R and such an assessment determines a less favourable risk weight than the use of the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R, then the general preferential treatment for short-term exposures must not be used and all unrated short-term claims must be assigned the same risk weight as that applied by the specific short-term assessment.

BIPRU 3.4.43

handbook-guidance
BIPRU 3 Annex 4 G contains a flow diagram guide to determining the risk weight to be applied to short-term exposures to institutions according to whether a short-term credit assessment is available.

Exposures to institutions: Short-term exposures in the national currency of the borrower

BIPRU 3.4.44

handbook-rule

A firm may assign to an exposure to an institution formed under the law of the United Kingdom of a residual maturity of 3 months or less denominated and funded in pounds sterling a risk weight that is one category less favourable than the preferential risk weight, as described in BIPRU 3.4.5 R (Exposures in the national currency of the borrower), assigned to exposures to the central government of the United Kingdom.

[Note: BCD Annex VI Part 1 point 37]

BIPRU 3.4.45

handbook-rule
  1. (1) Where a competent authority of another EEA State implements point 37 of Part 1 of Annex VI of the Banking Consolidation Directive by exercising the discretion to allow the treatment in that point, a firm may assign to the relevant national currency exposures the risk weight permitted by that CRD implementation measure.
  2. (2) When the competent authority of a third country which applies supervisory and regulatory arrangements at least equivalent to those applied in the EEA assigns to an exposure to an institution formed under the law of that third country of a residual maturity of 3 months or less denominated and funded in the national currency a risk weight that is one category less favourable than the preferential risk weight, as described in BIPRU 3.4.6 R (Exposures in the national currency of the borrower), assigned to exposures to the central government of that third country, a firm may risk weight such exposures in the same manner.

[Note: BCD Annex VI Part 1 point 37]

BIPRU 3.4.46

handbook-rule

No exposures of a residual maturity of 3 months or less denominated and funded in the national currency of the borrower may be assigned a risk weight less than 20%.

Exposures to institutions: Investments in regulatory capital instruments

BIPRU 3.4.47

handbook-rule

Investments in equity or regulatory capital instruments issued by institutions must be risk weighted at 100%, unless deducted from capital resources.

[Note: BCD Annex VI Part 1 point 39]

Exposures to institutions: Minimum reserves required by the ECB

BIPRU 3.4.48

handbook-rule

Where an exposure to an institution is in the form of minimum reserves required by the European Central Bank or by the central bank of an EEA State to be held by the firm, a firm may assign the risk weight that would be assigned to exposures to the central bank of the EEA State in question provided:

  1. (1) the reserves are held in accordance with Regulation (EC) No. 1745/2003 of the European Central Bank of 12 September 2003 or a subsequent replacement regulation or in accordance with national requirements in all material respects equivalent to that Regulation; and
  2. (2) in the event of the bankruptcy or insolvency of the institution where the reserves are held, the reserves will be fully repaid to the firm in a timely manner and will not be available to meet other liabilities of the institution.

[Note: BCD Annex VI Part 1 point 40]