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BIPRU 8.7 Consolidated capital resources requirements

General approach

BIPRU 8.7.1G

The calculation of the consolidated capital resources requirement of a firm's UK consolidation group or non-EEA sub-group involves taking the individual components that make up the capital resources requirement on a solo basis and applying them on a consolidated basis. Those components are the capital charge for credit risk (the credit risk capital requirement), the capital charge for market risk (the market risk capital requirement), the capital charge for operational risk (the operational risk capital requirement) and the fixed overheads requirement.

BIPRU 8.7.2G

Each of the capital charges in BIPRU 8.7.1 G, as applied on a consolidated basis, is called a consolidated requirement component. The name of each consolidated requirement component reflects the solo capital charge on which it is based. Solo capital charges are called risk capital requirements. Thus for example the consolidated requirement component for market risk is called the consolidated market risk requirement. The calculation of the consolidated market risk requirement is based on the calculation of the capital charge for market risk that applies on a solo basis (the market risk capital requirement). So the risk capital requirement applicable to the consolidated market risk requirement is the market risk capital requirement.

BIPRU 8.7.5G

In general a firm should calculate each consolidated requirement component using the appropriate regulator's rules, even in the case of group members who are subject to the capital requirements of an overseas regulator. However this section sets out certain circumstances in which a firm may use the capital requirements of an overseas regulator.

BIPRU 8.7.6G

BIPRU 8.8 (Advanced prudential calculation approaches) says that a firm should not apply an advanced prudential calculation approach on a consolidated basis unless the advanced prudential calculation approach permission allowing the firm to use the advanced prudential calculation approach specifically allows it to be used on consolidated basis.

BIPRU 8.7.7G

BIPRU 8.8 (Advanced prudential calculation approaches) has further details about how capital requirements are calculated on a consolidated basis if a firm uses an advanced prudential calculation approach.

BIPRU 8.7.8G

A firm has a choice about how it should apply a risk capital requirement to the group. It may do this by treating the whole of the group as a single entity and applying the risk capital requirement to the group (a line by line approach), calculating a separate risk capital requirement for each group member (an aggregation approach) or a mixture of the two.

BIPRU 8.7.9G

A firm may make the choice between an aggregation and a line by line approach differently for each consolidated requirement component. So for example a firm may decide to calculate the consolidated market risk requirement on an aggregation basis and the consolidated fixed overheads requirement on a line by line basis.

Method of calculation to be used

Calculation of the consolidated requirement components

BIPRU 8.7.11R

A firm must calculate a consolidated requirement component by applying the risk capital requirement applicable to that consolidated requirement component to the UK consolidation group or non-EEA sub-group in accordance with BIPRU 8.7.13 R. Except where BIPRU 8.7.34 R to BIPRU 8.7.38 R allow the requirements of another regulator to be used, the risk capital requirement must be calculated in accordance with the appropriate regulator's rules. The risk capital requirement applicable to a consolidated requirement component is the one specified in the second column of the table in BIPRU 8.7.12 R.

Choice of consolidation method

BIPRU 8.7.13R

  1. (1)

    A firm must calculate a consolidated requirement component by using one of the methods in this rule.

  2. (2)

    Under the first method a firm must:

    1. (a)

      apply the risk capital requirement set out in BIPRU 8.7.12 R to each undertaking in the UK consolidation group or non-EEA sub-group; and

    2. (b)

      add the risk capital requirements together.

  3. (3)

    Under the second method a firm must:

    1. (a)

      treat the whole UK consolidation group or non-EEA sub-group as a single undertaking; and

    2. (b)

      apply the risk capital requirement set out in BIPRU 8.7.12 R to the group on an accounting consolidation basis.

  4. (4)

    The third method is a mixture of methods one and two. Under the third method a firm must:

    1. (a)

      treat one or more parts of the UK consolidation group or non-EEA sub-group as separate single undertakings;

    2. (b)

      apply the risk capital requirement set out in BIPRU 8.7.12 R to each such part of the group on an accounting consolidation basis;

    3. (c)

      apply the risk capital requirement set out in BIPRU 8.7.12 R to each of the remaining undertakings in the UK consolidation group or non-EEA sub-group (if any); and

    4. (d)

      add the risk capital requirements together.

  5. (5)

    A firm may use different methods for different consolidated requirement components.

BIPRU 8.7.14G

An accounting consolidation basis means applying the rules in BIPRU 8.7.12 R on a line by line consolidation basis rather than an aggregation basis.

BIPRU 8.7.15G

The provisions of this section on credit risk and market risk restrict the choice given by BIPRU 8.7.13 R in certain circumstances.

Notifying the appropriate regulator of the choice of consolidation technique

BIPRU 8.7.16R

A firm must notify the appropriate regulator which method under BIPRU 8.7.13 R it applies for which consolidated requirement component and to which parts of the UK consolidation group or non-EEA sub-group it is applying an aggregation approach and to which parts it is applying an accounting consolidation approach.

Special rules for the consolidated credit risk requirement

BIPRU 8.7.17R
BIPRU 8.7.18G

The credit risk capital requirement (on which the consolidated credit risk requirement is based) is split into two3capital charges. One relates to credit risk in the non-trading book (the credit risk capital component). One relates to credit risk in the trading book (the counterparty risk capital component).

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BIPRU 8.7.19G

[deleted]1

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BIPRU 8.7.20R

A firm may use a combination of the CCR standardised method, the CCR mark to market method and the CCR internal model method on a permanent basis with respect to the firm's UK consolidation group or non-EEA sub-group for the purposes of calculating the consolidated credit risk requirement. In particular, where the firm is permitted to apply the CCR internal model method on a consolidated basis with respect to its UK consolidation group or non-EEA sub-group, it may combine the use of CCR standardised method and CCR mark to market method on a permanent basis for financial derivative instruments and long settlement transaction not covered by its CCR internal model method permission.

BIPRU 8.7.21R

BIPRU 9.4.1 R (Minimum requirements for recognition of significant credit risk transfer) as applied on a consolidated basis requires the transfer to be to a person outside the UK consolidation group or non-EEA sub-group.

BIPRU 8.7.22R
BIPRU 8.7.23R

  1. (1)

    A firm may only treat an exposure as exempt under BIPRU 3.2.25 R (Zero risk-weighting for intra-group exposures) as applied on a consolidated basis if the member of the UK consolidation group or non-EEA sub-group that has the exposure:

    1. (a)

      is a BIPRU firm and that exposure is exempt under BIPRU 3.2.25 R as it applies to that BIPRU firm on a solo basis; or

    2. (b)

      meets the conditions in BIPRU 3.2.25 R (1)(d) (Condition relating to establishment in the UK) and that exposure would be exempt under (a) if that member was a BIPRU firm.

  2. (2)

    The notification obligation in BIPRU 3.2.35 R applies.

Special rules for the consolidated market risk requirement

BIPRU 8.7.24R

For the purposes of calculating the consolidated market risk requirement of a UK consolidation group or non-EEA sub-group, a firm must apply BIPRU 1.2.3 R (Definition of the trading book) and BIPRU 1.2.17 R (Size thresholds for the purposes of the definition of the trading book) to the whole UK consolidation group or non-EEA sub-group as if the group were a single undertaking.

BIPRU 8.7.25R

A firm may not apply the second method in BIPRU 8.7.13R (3) (accounting consolidation for the whole group) or apply accounting consolidation to parts of its UK consolidation group or non-EEA sub-group under method three as described in BIPRU 8.7.13R (4)(a) for the purposes of the calculation of the consolidated market risk requirement unless the group or sub-group and the undertakings in that group or sub-group satisfy the conditions in this rule. Instead the firm must use the aggregation approach described in BIPRU 8.7.13R (2) (method one) or BIPRU 8.7.13R (4)(c). Those conditions are as follows:

  1. (1)

    each of the undertakings in that group or sub-group is an institution that is:

    1. (a)

      a BIPRU firm;

    2. (b)

      an EEA firmthat is a CAD investment firm; or3

      3
    3. (c)

      [deleted]3

      3
    4. (d)

      a recognised third country investment firm;

  2. (2)

    each of the undertakings referred to in (1) that is a BIPRU firm has capital resources that are equal to or in excess of its capital resources requirement ;

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  3. (3)

    each of the undertakings referred to in (1) that is an EEA firm complies with the CRD implementation measures in its EEA State that correspond to the requirements in (2);

  4. (4)

    each of the undertakings referred to in (1) that is a recognised third country investment firm complies with laws in the state or territory in which it has its head office that are equivalent to the requirements of the Banking Consolidation Directive or Capital Adequacy Directive relating to capital adequacy;

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  5. (5)

    there is no material legal, regulatory or contractual impediment to the transfer of funds between those undertakings in that group or sub-group;

  6. (6)

    there is no material legal, regulatory or contractual impediment to mutual financial support between those undertakings in that group or sub-group;

  7. (7)

    the market risk position of the undertakings are monitored and managed on a co-ordinated basis; and

  8. (8)

    there is satisfactory allocation of capital within the group or sub-group.

Special rules for the consolidated operational risk requirement

BIPRU 8.7.26R

For the purposes of calculating the consolidated operational risk requirement, a firm must apply BIPRU 6.2.9 R to BIPRU 6.2.12 R (Combination of different methodologies) to the whole UK consolidation group or non-EEA sub-group as if the group were a single undertaking.

BIPRU 8.7.27R

  1. (1)

    This rule sets out how BIPRU 6.3.2 R (3) (Negative figure arising in calculation of the relevant indicator under the basic indicator approach) applies on a consolidated basis.

  2. (2)

    If the calculation for any individual undertaking under method one in BIPRU 8.7.13R (2) (application of aggregation approach to the whole group) or method three as described in BIPRU 8.7.13R (4)(c) (mixture of aggregation and accounting consolidation) or for any sub-group created under method three as described in BIPRU 8.7.13R (4)(a) results in a figure of zero or a negative figure, that figure must be excluded.

  3. (3)

    If a firm is using method two in BIPRU 8.7.13 R (accounting consolidation approach for the whole group), BIPRU 6.3.2 R (3) applies to the UK consolidation group or non-EEA sub-group as if it were a single undertaking.

  4. (4)

    (3) also applies to a sub-group created under method 3 as described in BIPRU 8.7.13R (4)(a).

Special rules for calculating specific consolidated requirement components

BIPRU 8.7.28G

BIPRU 8.7.21 R to BIPRU 8.7.26 R are generally examples of the application of the general principles in BIPRU 8.2.1 R (Main consolidation rule for UK consolidation groups) and BIPRU 8.3.1 R (Main consolidation rule for non-EEA sub-groups). BIPRU 8.7.20 R and BIPRU 8.7.25 R are exceptions to those principles.

Elimination of intra-group transactions

BIPRU 8.7.29R

In accordance with BIPRU 8.2.1 R and BIPRU 8.3.1 R (The basic consolidation rules for a UK consolidation group or non-EEA sub-group), a firm may exclude that part of the risk capital requirement that arises as a result of:

  1. (1)

    (in respect of the consolidated credit risk requirement) intra-group balances; or

  2. (2)

    (in respect of the consolidated operational risk requirement and consolidated fixed overheads requirement) intra-group transactions;

with other undertakings in the UK consolidation group or non-EEA sub-group.

Other provisions about calculating risk capital requirements

BIPRU 8.7.31G

If a firm is calculating a risk capital requirement for an undertaking that is not a BIPRU firm it should calculate it as if the undertaking were a BIPRU firm.

BIPRU 8.7.33G

A firm should not use an advanced prudential calculation approach for calculating a risk capital requirement unless this is permitted as explained in BIPRU 8.8 (Advanced prudential calculation approaches).

Use of the solo requirements of another EEA competent authority

BIPRU 8.7.34R

A firm may calculate the risk capital requirement for an institution in the firm's UK consolidation group or non-EEA sub-group that is an EEA firm in accordance with the CRD implementation measures in the EEA firm's EEA State that correspond to the appropriate regulator's rules that would otherwise apply under this section if the institution is subject to those CRD implementation measures.

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BIPRU 8.7.35R
  1. (1)

    [deleted]2

  2. (2)

    [deleted]2

BIPRU 8.7.36G

[deleted]2

2

Use of the consolidated requirements of another EEA competent authority

BIPRU 8.7.37R
  1. (1)

    This rule applies if:

    1. (a)

      a firm is applying an accounting consolidation approach to part of its UK consolidation group or non-EEA sub-group under method three as described in BIPRU 8.7.13R (4)(a); and

    2. (b)

      the part of the group in (a) constitutes the whole of a group subject to the consolidated capital requirements of a competent authority under the CRD implementation measures relating to consolidation under the Banking Consolidation Directive or the Capital Adequacy Directive.

  2. (2)

    If the conditions in this rule are satisfied, a firm may apply the consolidated capital requirement in (1)(b) as the risk capital requirement for the group identified in (1)(a) so far as that consolidated capital requirement corresponds to the appropriate regulator's rules that would otherwise apply under this section.

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BIPRU 8.7.38R

[deleted]2

Prohibition on using the standardised rules of a regulator outside the EEA

BIPRU 8.7.38AR
  1. (1)

    2This rule applies to a firm if:

    1. (a)

      an institution in its UK consolidation group or non-EEA sub-group is subject to any of the rules or requirements of, or administered by, a third-country competent authority applicable to its financial sector that correspond to the sectoral rules applicable to that financial sector (“corresponding sectoral rules”); or

    2. (b)

      a part of its UK consolidation group or non-EEA sub-group constitutes the whole of a group subject to the consolidated capital requirements of a third-country competent authority under the corresponding sectoral rules applicable to the banking sector or the investment services sector for a state or territory outside the EEA.

  2. (2)

    A firm may not use the requirements under any of the corresponding sectoral rules of a state or territory outside the EEA in order to calculate the consolidated capital resources requirement of its UK consolidation group or non-EEA sub-group for the purpose of this chapter.

Use of an advanced prudential calculation approach under the rules of an overseas regulator

BIPRU 8.7.39G

A firm should not use the requirements of an overseas regulator if that would involve the use of an advanced prudential calculation approach unless this is permitted under BIPRU 8.8 (Advanced prudential calculation approaches).