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BIPRU 3.2 The central principles of the standardised approach to credit risk

BIPRU 3.2.1R

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 3.2.2R

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.

[Note: BCD Article 78(1) part]

BIPRU 3.2.3R

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.

[Note: BCD Article 78(3)]

BIPRU 3.2.4G

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.

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

BIPRU 3.2.5G

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 3.2.6G

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

BIPRU 3.2.7G

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).

[Note: reference to BCD Article 78(1), part. Implementation in BIPRU 13]

BIPRU 3.2.8G

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.

[Note: reference to BCD Article 78(4). Implementation in BIPRU 13]

Exposure Classes

BIPRU 3.2.9R

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 corporates1;

  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 corporates1;

  15. (15)

    claims in the form of CIUs; or

  16. (16)

    other items.

    [Note: BCD Article 79(1)]

BIPRU 3.2.10R

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 3.2.11R

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

[Note: BCD Article 79(2)(c) last sentence]

BIPRU 3.2.12R

Securities are not eligible for the retail exposure class.

[Note: BCD Article 79(2) last sentence]

BIPRU 3.2.13R

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

[Note: BCD Article 79(3)]

Retail exposures: Significance

BIPRU 3.2.14G

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 3.2.15G

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 appropriate regulator 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 3.2.16G
  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 3.2.17G

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 appropriate regulator 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 3.2.18G

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 3.2.19G

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 3.2.20R
  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 3.2.21R

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.

[Note: BCD Article 80(2)]

BIPRU 3.2.22R

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.

[Note: BCD Article 80(4)]

BIPRU 3.2.23R

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

[Note: BCD Article 80(5)]

BIPRU 3.2.24R

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%.

[Note: BCD Article 80(6)]

Zero risk-weighting for intra-group exposures: core UK group2

BIPRU 3.2.25R
  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:

    2
    1. (a)

      the counterparty is

      2
      1. (i)

        a core concentration risk group counterparty; and2

        2
      2. (ii)

        an institution,2 financial holding company, mixed financial holding company,3 financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements;

    2. (b)

      [deleted]2

      2
    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; 2

    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

      22
    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)]2

BIPRU 3.2.25AG
  1. (1)

    4[deleted]

    4
  2. (2)

    [deleted]

    4
BIPRU 3.2.26R

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 3.2.27R
  1. (1)

    [deleted]2

    2
    1. (a)

      [deleted]

      22
    2. (b)

      [deleted]2

      2
    3. (c)

      [deleted]2

      2
  2. (2)

    [deleted]2

    2
BIPRU 3.2.27AR
  1. (1)

    2For the purpose of BIPRU 3.2.25R (1)(e), a firm must be able on an ongoing basis to demonstrate fully to the appropriate regulator 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) and any other requirements relating to capital resources or concentration risk imposed on a firm by or under the regulatory system.

    4
  3. (3)

    4For the purpose of (2), the obligation to increase the firm's capital resources may be limited to capital resources available to the counterparty and may reasonably exclude such amount of capital resources that, if transferred to the firm, would cause the counterparty to become balance sheet insolvent in the manner contemplated in section 123(2) of the Insolvency Act 1986.

BIPRU 3.2.28G

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 appropriate regulator to undertake qualitative supervision of the management of the integrated risk management function.

BIPRU 3.2.29G

In relation to a core concentration risk group counterparty, an 2 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).

22
BIPRU 3.2.29AG
  1. (1)

    2In 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 appropriate regulator for a waiver of this condition if it can demonstrate fully to the appropriate regulator that the counterparty's centre of main interests is situated in the United Kingdom within the meaning of that Regulation.

BIPRU 3.2.30G

For the purpose of BIPRU 3.2.25R (1)(e) (Prompt transfer of capital resources): 2

2
  1. (1)

    2in 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; and2

  2. (2) 4

    4[deleted]

  3. (3)

    4the FCA will consider the following criteria:

    1. (a)

      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. (b)

      whether there are any interests other than those of the firm in the core concentration risk group counterparty and what impact those other interests may have on the firm's control over the core group concentration risk group counterparty and the ability of the firm to require a transfer of funds or repayment of liabilities;

    3. (c)

      whether there are any tax disadvantages for the firm or the core concentration risk group counterparty as a result of the transfer of funds or repayment of liabilities;

    4. (d)

      whether the purpose of the core concentration risk group counterparty prejudices the prompt transfer of funds or repayment of liabilities;

    5. (e)

      whether the legal structure of the core concentration risk group counterparty prejudices the prompt transfer of funds or repayment of liabilities;

    6. (f)

      whether the contractual relationships of the core concentration risk group counterparty with the firm and other third parties prejudices the prompt transfer of funds or repayment of liabilities; and

    7. (g)

      whether past and proposed flows of funds between the core concentration risk group counterparty and the firm demonstrate the ability to make prompt transfer of funds or repayment of liabilities.

BIPRU 3.2.31G

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 3.2.32G

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 3.2.33G

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 appropriate regulator as required.

BIPRU 3.2.34G

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 3.2.35R
  1. (1)

    A firm may not apply BIPRU 3.2.25 R unless it has a core UK group waiver.2

    2
  2. (2)

    [deleted]2

    2
  3. (3)

    A firm may stop applying BIPRU 3.2.25 R or may stop applying it to some exposures.

  4. (4)

    [deleted]2

    2
  5. (5)

    A firm must notify the appropriate regulator 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 3.2.36G

[deleted]2

2
BIPRU 3.2.37G

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 3.2.38R

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]