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BIPRU 12.6 Simplified ILAS

BIPRU 12.6.1G

The appropriate regulator recognises that it may not always be appropriate to apply BIPRU 12.5 (Individual Liquidity Adequacy Standards) to every ILAS BIPRU firm. For a firm which operates a relatively simple business model, it may instead be appropriate to allow the firm to calculate the size and content of its liquid assets buffer according to a simplified approach prescribed in the Handbook in advance of any review of that firm's liquidity risk conducted by the appropriate regulator. This section sets out the simplified ILAS approach to maintaining a liquid assets buffer and a firm that operates that approach is a simplified ILAS BIPRU firm.

BIPRU 12.6.2R

An ILAS BIPRU firm that wishes to operate the simplified ILAS approach must:

  1. (1)

    satisfy the conditions in BIPRU 12.6.6R to BIPRU 12.6.8R; and

  2. (2)

    obtain a simplified ILAS waiver from the appropriate regulator.

BIPRU 12.6.3G

A firm will therefore lose the benefit of its simplified ILAS waiver if it ceases to satisfy the conditions in BIPRU 12.6.6R to BIPRU 12.6.8R. Consistent with Principle 11 (Relations with regulators), if a firm anticipates that it may breach those conditions, it should notify the appropriate regulator promptly.

BIPRU 12.6.4R

A simplified ILAS BIPRU firm must calculate the size of its simplified buffer requirement in accordance with BIPRU 12.6.9Rto BIPRU 12.6.18R.

BIPRU 12.6.5G

The appropriate regulator is likely to regard a simplified ILAS BIPRU firm whose liquid assets buffer accords with the simplified buffer requirement as having an adequate buffer of assets and a prudent funding profile for the purpose of BIPRU 12.2.8R. However, the simplified ILAS approach does not relieve a simplified ILAS BIPRU firm from the obligation to hold liquidity resources which are adequate for the purpose of meeting the overall liquidity adequacy rule or from the obligation in BIPRU 12.3.4Rto assess and maintain on an ongoing basis the adequacy of its liquidity resources. Consequently, where a firm's own assessment of the adequacy of its liquidity resources indicates that its liquid assets buffer should be larger in size than that produced by the application of the simplified buffer requirement, the appropriate regulator will expect that firm to maintain a liquid assets buffer which is consistent with the results of its own assessment. Equally, following any review by the appropriate regulator of the liquidity risk to which a simplified ILAS BIPRU firm is exposed, the appropriate regulator may give that firm individual liquidity guidance advising it that its liquid assets buffer should be bigger than that which is produced by the application of the simplified buffer requirement.

Simplified ILAS conditions

BIPRU 12.6.6R

The first condition is that:

  1. (1)

    no less than 75% of the firm's total liabilities are accounted for by retail deposits and:2

    1. (a)

      2the firm's total assets do not exceed 250 million; or

    2. (b)

      2the firms total assets do not exceed 1 billion and no less than 70% of those assets are accounted for by:

      1. (i)

        assets of the kind that fall into BIPRU 12.7.2 R and which the firm counts towards its simplified buffer requirement; and

      2. (ii)

        retail loans; or

    3. (c)

      2no less than 70% of the firm's total assets are accounted for by retail loans; or

    4. (d)

      2no less than 70% of the firm's total assets are accounted for by:

      1. (i)

        money-market instruments with a residual contractual maturity of three months or less; or

      2. (ii)

        sight deposits held with a credit institution; or

      3. (iii)

        term deposits with a residual contractual maturity of three months or less held with a credit institution; or

  2. (2)

    no less than 80% of the firm's total liabilities are accounted for by liabilities owed to its parent undertaking and the amount of the firm's total assets does not exceed 1 billion.2

    2
    1. (a)

      2[deleted]2

    2. (b)

      2[deleted]2

    3. (c)

      2[deleted]2

  3. (3)

    [deleted]2

    2
BIPRU 12.6.6AR

2For the purpose of BIPRU 12.6.6 R, a firm must calculate:

  1. (1)

    its total assets by reference to its most recent FSA001 data item; and

  2. (2)

    its retail loans as the total of its lending to the retail sector recorded in cell 11A in its most recent FSA015 data item.

BIPRU 12.6.7R

In this section:32

  1. (1)

    a retail deposit is a deposit accepted from a consumer; and32

    2
  2. (2)

    SME deposits are deposits accepted from, and account balances where the account holders are, small and medium-sized enterprises (or partnerships or sole traders or charities5 which would be small and medium-sized enterprises if they were companies).32

    2
BIPRU 12.6.8R

The second condition is that no less than 99.5% of the firm's total assets and no less than 99.5% of its total liabilities are denominated in sterling, euros or United States dollars.

Size of the simplified buffer requirement

BIPRU 12.6.9R
  1. (1)

    A simplified ILAS BIPRU firm must ensure that the size of its liquid assets buffer is at all times greater than or equal to 50% of 6the amount produced by adding:

    1. (a)

      the wholesale net cash outflow component;

    2. (b)

      the retail and SME deposit 3component; and

    3. (c)

      the credit pipeline component.

  2. (2)

    This is the simplified buffer requirement.

The wholesale net cash outflow component

BIPRU 12.6.10R
  1. (1)

    The wholesale net cash outflow component is a firm's peak cumulative wholesale net cash outflow over the next three months where the peak is established by:

    1. (a)

      calculating the daily wholesale net cash flow by reference to a firm's wholesale assets maturing that day and its wholesale liabilities falling due on that day;

    2. (b)

      for each of the business days in the next three months, calculating the cumulative total of such daily net cash flows as at the business day in question; and

    3. (c)

      identifying the minimum cumulative total figure out of all of the cumulative total figures calculated in accordance with (b).

  2. (2)

    The figure identified in (1)(c) is the peak cumulative wholesale net cash outflow.

  3. (3)

    For the purpose of calculating the peak cumulative wholesale net cash outflow, a firm must:

    1. (a)

      exclude from the calculation in (1)(a) cash flows attributable to repo and reverse repo, forward sales, forward purchases, redemptions and any other transactions3 entered into by the firm where the security leg of the transaction in question is in respect of securities of the type described in BIPRU 12.7.2R (1) and (2);

    2. (b)

      include wholesale cash outflows in that calculation according to their earliest contractual maturity;

      3
    3. (c)

      exclude wholesale cash flows attributable to reserves in the form of sight deposits with a central bank and designated money market funds that it includes in its liquid assets buffer in accordance with the rules on asset eligibility in BIPRU 12.7; and3

    4. (d)

      exclude any retail deposits or SME deposits.3

The retail and SME deposit3 component

BIPRU 12.6.11R
  1. (1)

    The retail and SME deposit3 component is the sum represented by:

    1. (a)

      20% of a firm's Type A retail deposits;

      3
    2. (b)

      10% of a firm's Type B retail deposits; and3

    3. (c)

      20% of a firm's SME deposits.3

  2. (2)

    A firm must:

    1. (a)

      assess the likelihood that retail deposits that it holds will be withdrawn in response to actual or perceived changes in the firm's credit-worthiness;

    2. (b)

      calculate the amount of retail deposits that it assesses as having a higher than average likelihood of withdrawal in the circumstances described in (a) (Type A retail deposits); and

    3. (c)

      class all other of its retail deposits as Type B retail deposits.

BIPRU 12.6.12G

In the appropriate regulator's view, a Type A retail deposit is likely to include one which:

  1. (1)

    has been accepted through the internet; or

  2. (2)

    is considered to have a more than average sensitivity to interest rate changes (such as a deposit whose acceptance can reasonably be attributed to the use of price-focused advertising by the firm accepting the deposit); or

  3. (3)

    in relation to any individual depositor exceeds to a significant extent the amount of that individuals deposits with the accepting firm that are covered by a national deposit guarantee scheme; or

  4. (4)

    is not accepted from a depositor with whom the firm has had a long relationship; or

  5. (5)

    is accepted from retail depositors who can access their deposits before their residual contractual maturity subject to a loss of interest or payment of another form of early access charge (as a general proposition, the behaviour of liabilities to retail depositors is likely to depend in part on the contractual terms and conditions which give rise to those liabilities); or

  6. (6)

    is not held in an account which is maintained for transactional purposes.

BIPRU 12.6.13R

Before applying for a simplified ILAS waiver, a firm must prepare a written policy statement recording its approach to assessing the likelihood of withdrawal of its retail deposits in the circumstances described in BIPRU 12.6.11R (2)(a) and ensure that:

  1. (1)

    the firm's governing body approves and conducts appropriate reviews of the policy statement; and

  2. (2)

    the firm submits a copy of the policy statement to its usual supervisory contact at the appropriate regulator.

BIPRU 12.6.14G

In considering a firm's application for a simplified ILAS waiver, the appropriate regulator will take into account the firm's policy statement submitted to it under BIPRU 12.6.13R and form a view about the appropriateness of the assumptions on which the policy statement is based. Where a policy statement submitted after the grant of a simplified ILAS waiver reflects a materially different assessment to that set out in the policy statement considered as part of a firm's waiver application, a firm should expect that the appropriate regulator will wish to review the continued appropriateness of the firm's simplified ILAS waiver and in so doing will re-examine afresh all matters to which it had regard when the waiver in question was granted. The appropriate regulator expects a firm to review the appropriateness of its policy statement as often as is necessary and in any event no less frequently than annually. A firm should always review the continued appropriateness of its policy statement following a material change to the nature of the firm's business. Where a firm updates or otherwise changes its policy statement it should submit promptly to the appropriate regulator the new document.

The credit pipeline component

BIPRU 12.6.15R

The credit pipeline component is the sum represented by 25% of a firm's credit facilities offered to its customers but which are yet to be drawn down, including:

4
  1. (1)

    offers to make loans secured on residential property;

  2. (2)

    overdraft facilities; and

  3. (3)

    credit card facilities.

Buffer securities restriction

BIPRU 12.6.16R
  1. (1)

    A simplified ILAS BIPRU firm may only include in its liquid assets buffer eligible government and designated multilateral development bank debt securities up to the value of the buffer securities restriction.

  2. (2)

    For the purpose of calculating the buffer securities restriction, a firm must:

    1. (a)

      calculate its daily net flow in government and designated multilateral development bank debt securities eligible as classes of assets for inclusion in the firm's liquid assets buffer;

    2. (b)

      for each of the business days in the next three months calculate the cumulative total of such daily securities flows, including the opening balance, as at the business day in question; and

    3. (c)

      identify the minimum cumulative total figure out of all of the cumulative total figures calculated in accordance with (b).

  3. (3)

    For the purpose of (2)(a), a firm must include:3

    1. (a)

      all contractual inflows and outflows of eligible debt securities arising from repo, reverse repo, forward sales, forward purchases, redemptions and any other transactions involving those securities; and3

    2. (b)

      those cash flows excluded under BIPRU 12.6.10 R (3)(a).3

BIPRU 12.6.17G

In mathematical terms the calculation in BIPRU 12.6.9R and BIPRU 12.6.16R may be represented as follows:

16

Foreign currency positions

BIPRU 12.6.18R
  1. (1)

    Subject to (3), a simplified ILAS BIPRU firm that has assets or liabilities denominated in either or both euros and United States dollars must carry out separate calculations under BIPRU 12.6.9Rin relation to its positions in each of those currencies, in addition to that which it carries out in relation to its sterling positions (if any).

  2. (2)

    A firm to which (1) applies must ensure that, for the purpose of meeting the simplified buffer requirement, it holds in its liquid assets buffer assets denominated in either or both euros and United States dollars (as relevant) greater than or equal to the amount produced by the calculation in the corresponding currency required under (1), in addition to any sterling liquid assets that it is required to hold in its buffer in respect of its sterling positions.

  3. (3)

    Paragraph (1) does not apply to a simplified ILAS BIPRU firm that hedges fully its positions in either or both euros and United States dollars such that the firm is not exposed to any cross-currency liquidity risk in respect of those positions.

Content of the simplified ILAS liquid assets buffer

BIPRU 12.6.19G

The rules in BIPRU 12.7 set out the sorts of assets that are eligible for the liquid assets buffer of an ILAS BIPRU firm. Every ILAS BIPRU firm may include in its buffer reserves in the form of sight deposits at a central bank and high quality debt securities issued by governments and designated multilateral development banks subject to the eligibility rules in BIPRU 12.7. BIPRU 12.7 provides that a simplified ILAS BIPRU firm may also include in its buffer investments in a designated money market fund.

BIPRU 12.6.20G

A simplified ILAS BIPRU firm may include in the liquid assets buffer any combination of the eligible assets permitted by the rules in BIPRU 12.7.

ILSA

BIPRU 12.6.21R
  1. (1)

    A simplified ILAS BIPRU firm must regularly carry out an ILSA which contains an assessment of the firm's compliance with the standards set out in BIPRU 12.3 and BIPRU 12.4, including the results of the stress tests required by the rules in BIPRU 12.4.

  2. (2)

    The firm must make a written record of its ILSA.

  3. (3)

    The ILSA must be proportionate to the nature, scale and complexity of that firm's activities.

  4. (4)

    The ILSA must take into account group-wide liquidity resources only to the extent that reliance on these is permitted by the appropriate regulator.

BIPRU 12.6.22G

For the purpose of BIPRU 12.6.21R, a firm should carry out an ILSA at least annually, or more frequently if changes in its business or strategy or the nature, scale or complexity of its activities or the operational environment suggest that the current level of liquidity resources is no longer adequate. A firm should expect that the firm's usual supervisory contact at the appropriate regulator will ask for the ILSA to be submitted as part of the ongoing supervisory process.