Transitional Provisions and Schedules

Part

BIPRU Prudential sourcebook for Banks, Building Societies and Investment Firms

Chapter

Transitional Provisions and Schedules

Printed on: 22/05/2024

Rulebook at: 01/01/2014

Transitional Provisions and Schedules

BIPRU TP 2

Capital floors for a firm using the IRB or AMA approaches

Application

2.1

Subject to BIPRU TP 2.2R, this section applies to a BIPRU firm that applies the IRB approach or the advanced measurement approach.

2.2

BIPRU TP 2.30R to BIPRU TP 2.34G apply to any firm to which BIPRU 8 (Group risk - consolidation) applies and which applies the IRB approach or the advanced measurement approach on a consolidated basis.

Purpose

2.3

This section in part implements Articles 152(1) - (7) of the Banking Consolidation Directive and Article 43 of the Capital Adequacy Directive.

2.4

The purpose of this section is to limit the amount of capital reduction arising from the implementation of the Banking Consolidation Directive and the Capital Adequacy Directive compared with the requirements arising from the previous versions of those Directives. As such it is effectively a comparison of the capital resource requirements arising from BIPRU with those arising from the appropriate IPRU sourcebook that would have applied as at 31 December 2006. However the effect of changes to the market risk requirements is removed by requiring BIPRU 7 (Market risk) to be used for both sides of the comparison.

How to apply the capital floors

2.5

This section does not require a firm to continue to have capital resources equal to a fixed percentage of the capital requirement that applied to it as at 31 December 2006. Instead a firm should apply the requirements in this section to its business as it changes over time. So for example if a firm is calculating its capital requirements as at 31 December 2008 it will have two calculations. The first is carried out under BIPRU and GENPRU. The second is carried out under IPRU and this section. Both sets of requirements are applied to the firm's figures as at 31 December 2008.

2.6

The Directive provisions on which this section is based are written as a floor on a firm's capital resources requirement. This section however is written as a second capital resources requirement that sits beside the general capital resources requirements of BIPRU and GENPRU. The reason for this is that a firm should meet the general capital resources requirements of BIPRU and GENPRU using capital resources calculated under GENPRU 2.2 (Capital resources). On the other hand a firm should meet the capital resources requirements of this section (which are based on IPRU) using the relevant IPRU definition. In practice the two sets of definitions of capital resources are similar apart from the provisions about expected loss. Therefore as shown by the example in BIPRU TP 2.12G and BIPRU TP 2.13G, in practice a firm is subject to a single capital resources requirement.

2.7

BIPRU TP 9 explains how the general principle in this section is applied to a personal investment firm.

Capital floors: solo

2.8

A firm calculating risk weighted exposure amounts in accordance with the IRB approach must during the following twelve-month periods after 31 December 2006 provide capital resources that equal or exceed the following amounts:

(1)

for the first twelve-month period, 95%;

(2)

for the second twelve-month period, 90%; and

(3)

for the third and each subsequent twelve-month period, 80%;

of the solo capital resources requirement that applies to the firm under whichever part of IPRU applies under BIPRU TP 1.4R.

2.9

A firm using the advanced measurement approach must, during each of the second, third and subsequent twelve-month periods after 31 December 2006, provide capital resources which are at all times more than or equal to the amounts indicated in BIPRU TP 2.8R(2) and BIPRU TP 2.8R(3).

Capital resources: solo

2.10

A firm must calculate its capital resources in accordance with whichever part of IPRU applies under BIPRU TP 1.4R.

2.11

Compliance with the requirements of this section must be on the basis of amounts of capital resources fully adjusted to reflect differences in the calculation of capital resources under IPRU and the calculation of capital resources under GENPRU and BIPRU deriving from the separate treatments of expected loss and unexpected loss under the IRB approach.

Waiver from IPRU capital resources requirement

2.11A

Article 152(5d) and (5e) of the Banking Consolidation Directive allows the appropriate regulator to waive the capital floor calculation based on the IPRU capital resources requirement in BIPRU TP 2.8R(3), or BIPRU TP 2.8R(3) as applied in BIPRU TP 2.9R, on a case-by-case basis only if a firm started to use the IRB approach or the advanced measurement approach on or after 1 January 2010. The appropriate regulator will consider an application for such a waiver in the light of the criteria in section 138A of the Act (Modification or waiver of rules).

2.11B

If a firm has a waiver referred to in BIPRU TP 2.11AG, it must provide capital resources that equal or exceed 80% of the capital resources requirement that the firm would be required to provide under the relevant sections of BIPRU applicable to it immediately before it started to use the IRB approach or the advanced measurement approach as those sections were in force on 31 December 2010.

Explanation of the calculation

2.12

The following provides an illustrative example of the application of this section to a bank in a period in which BIPRU TP 2.8R(1) applies (i.e. the 95% requirement). Say that under IPRU(BANK) the firm's capital resources requirement would be £8.00mn and this would be met in part by general/collective provisions of £0.5mn. This establishes the capital resources requirement under this section at 95% times (£8.0mn less £0.5mn), which equals £7.125mn.

2.13

Say that in the absence of this section, the Pillar 1 capital resources requirement of the firm in BIPRU TP 2.12G would be £6.4m, and the sum of value adjustments and provisions are £0.25mn less than expected losses. For the purposes of the expected loss calculation, if the result is negative (i.e. value adjustments and provisions are less than expected losses) that amount is deducted from capital resources (which is equivalent to an increase in the capital resources requirement). If the result is positive it is added to capital resources (which is equivalent to a decrease in the capital resources requirement). In this example the result is negative. As the sum of these two amounts (£6.65mn) is still less than the IPRU capital resources requirement of £7.125mn, the effect of this section is that the firm is subject to the (higher) IPRU requirement. If the sum of the BIPRU requirements had been greater than £7.125mn, then the firm would not have been subject to the capital resources requirement in this section.

Adjustments to the calculation of capital resources

2.14

A firm may treat any capital instrument that complies with the requirements of GENPRU 2.2 (Capital resources) as complying with the corresponding requirements of IPRU.

2.15

An example of BIPRU TP 2.14R is that a firm may treat subordinated debt with a term of five years or over that qualifies as lower tier two capital for the purposes of GENPRU as complying with the corresponding provisions for five year subordinated debt under IPRU.

Market risk

2.16

A firm must substitute the requirements in BIPRU for the calculation of the market risk capital requirement (excluding those provisions to the extent that they would involve using the IRB approach) for the corresponding provisions of IPRU.

2.17

BIPRU TP 4 to BIPRU TP 9 (Pre CRD capital requirements applying on a solo basis during 2007) explain which parts of IPRU correspond to the market risk capital requirement.

CAD 1 model and VaR model

2.18

If a firm has a CAD 1 permission or a VaR model permission it must also use it for the purposes of the capital floor calculations in this section.

2.19

In applying BIPRU TP 2.18R, a firm should not adjust the CAD 1 permission approach or VaR model approach (including the scope of the CAD 1 permission or VaR model permission) so that it is consistent with Directive 93/6 (the Capital Adequacy Directive) as it stood on 31 December 2006.

Individual capital guidance

2.20

The IPRU capital resources requirement does not include any individual capital ratio notified to a bank under Chapter CO of IPRU(BANK) or any similar notification by the appropriate regulator to any other firm.

2.21

Any further capital resource requirements that a firm is required to meet under GENPRU 1.2 (Adequacy of financial resources) (i.e. Pillar 2) should not be taken into account.

How to apply IPRU

2.22

If the part of IPRU that applies to a firm applies different calculations to different types of firm the firm must use the calculations that it would have to use under BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007).

2.23

If the part of IPRU that applies to a firm gives the firm a choice between methods of calculating capital resources or capital resources requirements it must exercise that choice consistently with the corresponding choices it makes in calculating capital resources or capital resources requirement under GENPRU and BIPRU.

2.24

BIPRU TP 4 to BIPRU TP 9 (Pre CRD capital requirements applying on a solo basis during 2007) explain how concepts in IPRU and GENPRU map onto the ones in IPRU. This will enable a firm to decide which calculations it should use for the purposes of BIPRU TP 2.22R and BIPRU TP 2.23R.

2.25

An example of the effect of BIPRU TP 2.22R and BIPRU TP 2.23R is that a securities and futures firm that calculates its capital resources under GENPRU 2 Annex 4 R (Capital resources table for a BIPRU investment firm deducting material holdings) should calculate its capital resources under IPRU using table 10-62(2)A of chapter 10 of IPRU(INV).

2.26

For the purpose of calculating the part of the IPRU capital resources requirement that corresponds to the concentration risk capital component a firm may identify the trading book exposures on which that requirement is based using BIPRU 10 (Large exposures requirements) except to the extent that BIPRU 10 involves the IRB approach.

2.27

The concentration risk capital component is the capital requirement for a firm that chooses to have trading book exposures that exceed the large exposure limits for the non-trading book. In most cases IPRU has a similar capital requirement. The purpose of BIPRU TP 2.26R is to allow a firm to calculate the amount of the excess trading book exposures for which it calculates the additional capital charge using BIPRU 10 (Large exposures requirements) in order to avoid having to apply the IPRU large exposure requirements for this purpose only.

2.28

The calculations under this section do not take into account the base capital resources requirement or the part of the IPRU solo capital resources requirement that corresponds to the base capital resources requirement.

Solo consolidation

2.29

If a firm has a solo consolidation waiver it also applies for the purpose of this section in place of any corresponding provision of IPRU.

Capital floors: consolidation

2.30

If a firm calculates risk weighted exposure amounts on a consolidated basis in accordance with the IRB approach or uses the advanced measurement approach on a consolidated basis, BIPRU TP 2.8R to BIPRU TP 2.27G apply on a consolidated basis in accordance with BIPRU TP 2.30R to BIPRU TP 2.31R.

2.31

A firm must calculate the consolidation requirements under BIPRU TP 2.30R for the group in question (the group in question is specified in BIPRU TP 2.32R) in accordance with the following:

(1)

if the group is a banking group as defined in BIPRU TP 1.7R (Classification of groups for certain consolidation rules), the consolidation provisions of IPRU(BANK) apply;

(2)

if the group is a building society group as defined in BIPRU TP 1.7R, the consolidation provisions of IPRU(BSOC) apply; and

(3)

if the group is an investment firm group as defined in BIPRU TP 1.7R, chapter 14 of IPRU(INV) applies.

2.32

The scope of the consolidation under BIPRU TP 2.30R and any exemption from consolidation is determined in accordance with BIPRU 8 (Group risk - consolidation) rather than IPRU. In particular, the following adjustments apply:

(1)

if a firm is a member of a UK consolidation group and applies the IRB approach or the AMA with respect to that UK consolidation group, BIPRU TP 2.30R applies with respect to that UK consolidation group; and

(2)

if a firm is a member of a non-EEA sub-group and applies the IRB approach or the AMA with respect to that non-EEA sub-group, BIPRU TP 2.30R applies with respect to that non-EEA sub-group.

2.33

If for example the consolidation rules that apply for the purposes of this section are those in chapter 14 of IPRU(INV) (Consolidated supervision of investment firms) then IPRU(INV) 14.1 (Application) and 14.2 (Scope of consolidation) do not apply. BIPRU 8.2 (Scope and basic consolidation requirements for UK consolidation groups), BIPRU 8.3 (Scope and basic consolidation requirements for non-EEA sub-groups), BIPRU 8.4 (CAD Article 22 groups and investment firm consolidation waiver) and BIPRU 8.5 (Basis of consolidation) apply instead.

Capital floors: waiver from consolidation

2.34

If a firm has an investment firm consolidation waiver and it is applying the IRB approach or the AMA, the waiver will explain how the investment firm consolidation waiver applies for the purpose of this section.

01/04/2013

BIPRU TP 21

Close substitutes for commodities

Application

21.1

This section applies to a BIPRU firm that on 31 December 2006 was applying the approach referred to in the first column of the table in BIPRU TP 21.3R with respect to particular grades or brands of the same commodity-class.

Commodities: close substitutes

21.2

A notice given under the IPRU provision in the second column of the table in BIPRU TP 21.3R is treated as having been given under BIPRU 7.4.23 R (Notice to the appropriate regulator about treatment of different grades or brands of the same commodity) for the purposes of BIPRU 7.4.22 R (Treatment of different grades or brands of the same commodity) with respect to the commodity grades or brands referred to in BIPRU TP 21.1R.

21.3

Table: Commodity treatments under IPRU
This table belongs to BIPRU TP 21.2R

IPRU provisions setting out commodity approach

IPRU provisions under which notice given

Paragraph 22(2) of appendix 6 of chapter 10 of IPRU(INV)

Paragraph 23 of appendix 6 of chapter 10 of IPRU(INV)

Paragraph 22(2) of chapter CM of IPRU(BANK)

Paragraph 23 of chapter CM of IPRU(BANK)

Explanation

21.3

BIPRU 7.4.22 R (1)(b) says that a firm should treat positions in different grades or brands of the same commodity-class as different commodities unless they are close substitutes and have price movements which have exhibited a stable correlation coefficient of at least 0.9 over the last 12 months. BIPRU 7.4.23 R says that a firm should notify the appropriate regulator in writing at least 20 business days prior to the date the firm starts relying on this treatment. The purpose of this section is to allow a notice given under the corresponding provisions of chapter 10 of IPRU(INV) or IPRU(BANK) to continue to have effect without the firm having to serve a new notice under BIPRU 7.4.23 R.

01/04/2013

BIPRU Sch 3

Fees and other requirement payments

01/01/2007

There are no requirements for fees or other payments in BIPRU.

01/04/2013

BIPRU Sch 6

Rules than can be waived

01/01/2007

The rules in BIPRU may be waived by the appropriate regulator under section 138A of the Act (Modification or waiver of rules). However, if the rules incorporate requirements laid down in European directives, it will not be possible for the appropriate regulator to grant a waiver that would be incompatible with the United Kingdom's responsibilities under those directives. It therefore follows that if a rule in BIPRU contains provisions which derive partly from a directive, and partly not, the appropriate regulator will be able to consider a waiver of the latter requirements only, unless the directive provisions are optional rather than mandatory.

01/04/2013