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

BIPRU 3.2.1RRP

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 3.2.2RRP

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 3.2.3RRP

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 3.2.4GRP

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 3.2.7GRP

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 3.2.9RRP

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 3.2.10RRP

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 3.2.11RRP

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 3.2.12RRP

Securities are not eligible for the retail exposure class.

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

BIPRU 3.2.13RRP

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

[Note: BCD Article 79(3)]

Retail exposures: Significance

BIPRU 3.2.14GRP

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 3.2.15GRP

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 3.2.16GRP
  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 3.2.17GRP

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 3.2.18GRP

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 3.2.19GRP

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 3.2.20RRP
  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 3.2.21RRP

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 3.2.22RRP

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 3.2.23RRP

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

[Note: BCD Article 80(5)]

BIPRU 3.2.24RRP

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

BIPRU 3.2.25RRP
  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 or to which the firm is linked by a consolidation Article 12(1) relationship provided that the following conditions are met:

    1. (a)

      the counterparty is:

      1. (i)

        an institution whose head office is in an EEA State; or

      2. (ii)

        an institution not within (a)(i), financial holding company, financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements;

    2. (b)

      the condition in BIPRU 3.2.27 R is satisfied;

    3. (c)

      the counterparty is subject to the same risk evaluation, measurement and control procedures as the firm;

    4. (d)

      the counterparty is established in the United Kingdom and either it is incorporated in the United Kingdom or (if that counterparty is of a type that falls within the scope of that Regulation) the centre of its main interests is situated within the United Kingdom within the meaning of the Council Regulation of 29 May 2000 on insolvency proceedings (Regulation 1346/2000/EC); and

    5. (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), part]

BIPRU 3.2.26RRP

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)

    The condition referred to in BIPRU 3.2.25 R (1)(b) is that both the counterparty and the firm are:

    1. (a)

      included within the scope of consolidation on a full basis with respect to the same UK consolidation group and BIPRU 8.3.1 R applies to the firm with respect to that UK consolidation group; or

    2. (b)

      included within the scope of consolidation on a full basis with respect to the same group by a competent authority of an EEA State other than the United Kingdom under the CRD implementation measures about consolidated supervision for that EEA State; or

    3. (c)

      (provided that this consolidation is carried out to standards equivalent to those in (a) and (b)) included within the scope of consolidation on a full basis with respect to the same group by a third country competent authority under prudential rules for the banking sector or investment services sector of or administered by that third country competent authority.

  2. (2)

    A group is subject to consolidation to equivalent standards for the purpose of (1)(c) only if the firm or another EEA firm in that group has been notified in writing by the FSA or a competent authority of another EEA State pursuant to Article 143 of the Banking Consolidation Directive that that group is subject to equivalent supervision.

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

BIPRU 3.2.28GRP

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 3.2.29GRP

An undertaking is included within the scope of consolidation of a group on a full basisas referred to in BIPRU 3.2.27 R (1) 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 3.2.30GRP

In the case of an undertaking that is a firm the requirement in BIPRU 3.2.25 R (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.

BIPRU 3.2.31GRP

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 3.2.33GRP

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 3.2.34GRP

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 3.2.35RRP
  1. (1)

    A firm may not apply BIPRU 3.2.25 R unless it has given one month's prior notice to the FSA that it intends do so.

  2. (2)

    A firm need only give the FSA the notice required in (1) once rather than with respect to each exposure.

  3. (3)

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

  4. (4)

    If a firm stops applying BIPRU 3.2.25 R it may start to apply it again if it notifies the FSA under (1) that it intends do so.

  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 3.2.36G

The FSA may discuss with a firm that makes the notification required in BIPRU 3.2.35 R (1) the reasons why the firm believes it meets the conditions in BIPRU 3.2.25 R (1).

BIPRU 3.2.37GRP

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 3.2.38RRP

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]