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

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]

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]

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)]

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)]

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)]

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]

Securities are not eligible for the retail exposure class.

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

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

[Note: BCD Article 79(3)]

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)]

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)]

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)]

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

[Note: BCD Article 80(5)]

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)]

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]

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]

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]

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.

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]