BIPRU 3.4 Risk weights under the standardised approach to credit risk
Risk weights: Exposures to central governments or central banks: Treatment
Without prejudice to BIPRU 3.4.2 R to BIPRU 3.4.9 R, exposures to central governments and central banks must be assigned a 100% risk weight.
[Note: BCD Annex VI Part 1 point 1]
Subject to BIPRU 3.4.4 R, exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.3 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
[Note: BCD Annex VI Part 1 point 2]
Table: Exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available
This table belongs to BIPRU 3.4.2 R.
1 |
2 |
3 |
4 |
5 |
6 |
|
0 % |
20 % |
50 % |
100 % |
100 % |
150 % |
Exposures to the European Central Bank must be assigned a 0% risk weight.
[Note: BCD Annex VI Part 1 point 3]
Exposures in the national currency of the borrower
When the competent authorities of a third country which apply supervisory and regulatory arrangements at least equivalent to those applied in the UK10 assign a risk weight which is lower than that indicated in BIPRU 3.4.1 R to BIPRU 3.4.3 R to exposures to their central government and central bank denominated and funded in the domestic currency, a firm may risk weight such exposures in the same manner.
[Note: BCD Annex VI Part 1 point 5]
Use of credit assessments by export credit agencies
An export credit agency credit assessment may be recognised by a firm for the purpose of determining the risk weight to be applied to an exposure under the standardised approach if either of the following conditions is met:
- (1)
the credit assessment is a consensus risk score from export credit agencies participating in the OECD "Arrangement on Guidelines for Officially Supported Export Credits"; or
- (2)
the export credit agency publishes its credit assessments, and the export credit agency subscribes to the OECD agreed methodology, and the credit assessment is associated with one of the eight minimum export insurance premiums (MEIP) that the OECD agreed methodology establishes.
[Note: BCD Annex VI Part 1 point 6]
Exposures for which a credit assessment by an export credit agency is recognised for risk weighting purposes must be assigned a risk weight according to the table in BIPRU 3.4.9 R.
[Note: BCD Annex VI Part 1 point 7]
Table: Exposure for which a credit assessment by an export credit agency is recognised
This table belongs to BIPRU 3.4.8 R.
MEIP |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
0% |
0% |
20% |
50% |
100% |
100% |
100% |
150% |
Exposures to regional governments or local authorities: General
Without prejudice to BIPRU 3.4.15 R to BIPRU 3.4.19 R:
- (1)
a firm must risk weight exposures to regional governments and local authorities in accordance with BIPRU 3.4.11 R to BIPRU 3.4.14 R10; and
8 - (2)
the preferential treatment for short-term exposures specified in BIPRU 3.4.37 R, BIPRU 3.4.39 R and BIPRU 3.4.44 R must not be applied.
[Note: BCD Annex VI Part 1 point 8]
Exposures to regional governments or local authorities: Central government risk weight based method
- (1)
Exposures to regional governments and local authorities must be assigned a risk weight according to the credit quality step to which exposures to the central government of the jurisdiction in which the regional government or local authority is established are assigned in accordance with the table in BIPRU 3.4.12 R.
- (2)
Exposures to an unrated regional government or local authority must not be assigned a risk weight lower than that applied to exposures to its central government.
[Note: BCD Annex VI Part 1 points 25 and 26]
Table: Central government risk weight based method
This table belongs to BIPRU 3.4.11 R.
Credit quality step to which central government is assigned |
1 |
2 |
3 |
4 |
5 |
6 |
20% |
50% |
100% |
100% |
100% |
150% |
For exposures to regional governments and local authorities established in countries where the central government is unrated, the risk weight must be not more than 100%.
[Note: BCD Annex VI Part 1 point 27]
For exposures to regional governments and local authorities with an original effective maturity of three months or less, the risk weight must be 20%.
[Note: BCD Annex VI Part 1 point 28]
A firm must treat an exposure to a regional government or local authority of the United Kingdom listed in BIPRU 3 Annex 2 R as an exposure to the central government of the United Kingdom.
[Note: BCD Annex VI Part 1 point 9]
The appropriate regulator will include a regional government or local authority in the list in BIPRU 3 Annex 2 R where there is no difference in risk between exposures to that body and exposures to the central government of the United Kingdom because of the specific revenue-raising powers of the regional government or local authority, and the existence of specific institutional arrangements the effect of which is to reduce the risk of default.
[Note: BCD Annex VI Part 1 point 9]
Exposures to churches or religious communities constituted in the form of a legal person under public law must, in so far as they raise taxes in accordance with legislation conferring on them the right to do so, be treated as exposures to regional governments and local authorities, except that BIPRU 3.4.15 R does10 not apply.
[Note: BCD Annex VI Part 1 point 10]
When competent authorities of a third country jurisdiction which apply supervisory and regulatory arrangements at least equivalent to those applied in the UK10 treat exposures to regional governments and local authorities as exposures to their central government, a firm may risk weight exposures to such regional governments and local authorities in the same manner.
[Note: BCD Annex VI Part 1 point 11]
Exposures to administrative bodies and non-commercial undertakings
BIPRU 3.4.21 R to BIPRU 3.4.26 R2 set out the provisions applying to exposures to administrative bodies and non-commercial undertakings.
Treatment
Without prejudice to BIPRU 3.4.22 R to BIPRU 3.4.26 R, exposures to administrative bodies and non-commercial undertakings must be assigned a 100% risk weight.
[Note: BCD Annex VI Part 1 point 12]
Public sector entities
Without prejudice to BIPRU 3.4.23 R to BIPRU 3.4.26 R, exposures to public sector entities must be assigned a 100% risk weight.
[Note: BCD Annex VI Part 1 point 13]
A firm may treat an exposure to a public sector entity as an exposure to a regional government or local authority in accordance with BIPRU 3.4.11 R to BIPRU 3.4.14 R.
[Note: BCD Annex VI Part 1 point 14]
In exceptional circumstances a firm may treat an exposure to a public sector entity established in the United Kingdom as an exposure to the central government of the United Kingdom if there is no difference in risk between exposures to that body and exposures to the central government of the United Kingdom because of the existence of an appropriate guarantee by the central government.
[Note: BCD Annex VI Part 1 point 15]
When competent authorities of a third country jurisdiction, which apply supervisory and regulatory arrangements at least equivalent to those applied in the UK10, treat exposures to public sector entities as exposures to institutions, a firm may risk weight exposures to the relevant public sector entities in the same manner.
[Note: BCD Annex VI Part 1 point 17]
Exposures to multilateral development banks: Treatment
Without prejudice to BIPRU 3.4.28 R to BIPRU 3.4.29 R:
- (1)
a firm must treat exposures to multilateral development banks in the same manner as exposures to institutions in accordance with BIPRU 3.4.34 R to BIPRU 3.4.39 R (Exposures to institutions: credit assessment based method); and
- (2)
the preferential treatment for short-term exposures specified in BIPRU 3.4.37 R, BIPRU 3.4.39 R and BIPRU 3.4.44 R must not be applied.
[Note: BCD Annex VI Part 1 point 19]
An exposure to a multilateral development bank listed in point (a)9 of the definition in the Glossary must be assigned a 0% risk weight.
[Note: BCD Annex VI Part 1 point 20]
9Exposures to international organisations
Exposures to the following international organisations must be assigned a 0% risk weight:
Exposures to institutions: General
BIPRU 3.4.32 R to BIPRU 3.4.47R10 set out the treatment to be accorded to exposures to institutions.
Exposures to institutions: Treatment
Without prejudice to BIPRU 3.4.33 R to BIPRU 3.4.47 R, exposures to financial institutions authorised and supervised by the PRA and FCA10 and subject to prudential requirements equivalent to those applied to credit institutions must be risk weighted as exposures to institutions.
[Note: BCD Annex VI Part 1 point 24]
Exposures to institutions: Risk weight floor on exposures to unrated institutions
Exposures to an unrated institution must not be assigned a risk weight lower than that applied to exposures to its central government.
[Note: BCD Annex VI Part 1 point 25]
Exposures to institutions: Credit assessment based method
Exposures to institutions with a residual maturity of more than three months 6for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.35 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
[Note: BCD Annex VI Part 1 point 29]
Table: Exposures to institutions with a residual maturity of more than three months for which a credit assessment by a nominated ECAI is available6
This table belongs to BIPRU 3.4.34 R.
1 |
2 |
3 |
4 |
5 |
6 |
|
20% |
50% |
50% |
100% |
100% |
150% |
Without prejudice to BIPRU 3.4.33 R, exposures to unrated institutions must be assigned a risk weight of 50%.
[Note: BCD Annex VI Part 1 point 30]
Exposures to an institution with a residual maturity of three months or less 6for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.38 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
[Note: BCD Annex VI Part 1 point 31]
Table: Exposures to an institution with a residual maturity of three months or less for which a credit assessment by a nominated ECAI is available6
This table belongs to BIPRU 3.4.37 R.
1 |
2 |
3 |
4 |
5 |
6 |
|
20% |
20% |
20% |
50% |
50% |
150% |
Without prejudice to BIPRU 3.4.33 R, exposures to unrated institutions having an original effective maturity of three months or less must be assigned a 20% risk weight
[Note: BCD Annex VI Part 1 point 32]
Exposures to institutions: Interaction with short-term credit assessments
If there is no short-term credit assessment as set out in BIPRU 3.4.112 R, the general preferential treatment for short-term exposures as specified in BIPRU 3.4.37 R applies to all exposures to institutions of up to three months residual maturity.
[Note: BCD Annex VI Part 1 point 34]
If there is a short-term credit assessment as set out in BIPRU 3.4.112 R and such an assessment determines the application of a more favourable or identical risk weight than the use of the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R, then the short-term assessment and risk weighting specified in BIPRU 3.4.112 R must be used for that specific exposure only. Other short-term exposures must follow the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R.
[Note: BCD Annex VI Part 1 point 35]
If there is a short-term credit assessment as set out in BIPRU 3.4.112 R and such an assessment determines a less favourable risk weight than the use of the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R, then the general preferential treatment for short-term exposures must not be used and all unrated short-term claims must be assigned the same risk weight as that applied by the specific short-term assessment.
[Note: BCD Annex VI Part 1 point 36]
2BIPRU 3 Annex 4 G2 contains a flow diagram guide to determining the risk weight to be applied to short-term exposures to institutions according to whether a short-term credit assessment is available.
Exposures to institutions: Short-term exposures in the national currency of the borrower
A firm may assign to an exposure to an institution formed under the law of the United Kingdom of a residual maturity of 3 months or less denominated and funded in pounds sterling a risk weight that is one category less favourable than the preferential risk weight, as described in BIPRU 3.4.5 R (Exposures in the national currency of the borrower), assigned to exposures to the central government of the United Kingdom.
[Note: BCD Annex VI Part 1 point 37]
- (1)
[deleted]10
- (2)
When the competent authority of a third country which applies supervisory and regulatory arrangements at least equivalent to those applied in the EEA assigns to an exposure to an institution formed under the law of that third country of a residual maturity of 3 months or less denominated and funded in the national currency a risk weight that is one category less favourable than the preferential risk weight, as described in BIPRU 3.4.6 R (Exposures in the national currency of the borrower), assigned to exposures to the central government of that third country, a firm may risk weight such exposures in the same manner.
[Note: BCD Annex VI Part 1 point 37]
No exposures of a residual maturity of 3 months or less denominated and funded in the national currency of the borrower may be assigned a risk weight less than 20%.
[Note: BCD Annex VI Part 1 point 38]
Exposures to institutions: Investments in regulatory capital instruments
Investments in equity or regulatory capital instruments issued by institutions must be risk weighted at 100%, unless deducted from capital resources.
[Note: BCD Annex VI Part 1 point 39]
Exposures to corporates: General
BIPRU 3.4.50 R to BIPRU 3.4.52 R set out the treatment to be accorded to exposures to corporates.
Exposures to corporates: Treatment
Exposures for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.51 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
[Note: BCD Annex VI Part 1 point 41]
Table: Exposures for which a credit assessment by a nominated ECAI is available
This table belongs to BIPRU 3.4.50 R.
1 |
2 |
3 |
4 |
5 |
6 |
|
20% |
50% |
100% |
100% |
150% |
150% |
Unrated exposures must be assigned a 100% risk weight or the risk weight of its central government, whichever is the higher.
[Note: BCD Annex VI Part 1 point 42]
Retail exposures
Exposures that comply with the criteria listed in BIPRU 3.2.10 R must be assigned a risk weight of 75%. However a firm may treat such an exposure under BIPRU 3.2.24 R (100% risk weight).
[Note: BCD Annex VI Part 1 point 43]
Exposures secured by real estate property
BIPRU 3.4.55 R to BIPRU 3.4.89R10 set out the treatment to be accorded to exposures secured by real estate property.
Without prejudice to BIPRU 3.4.56 R to BIPRU 3.4.94 R, exposures fully secured by real estate property must be assigned a risk weight of 100%.
[Note: BCD Annex VI Part 1 point 44]
Exposures secured by mortgages on residential property
Without prejudice to BIPRU 3.4.85 R, an exposure or any part of an exposure fully and completely secured, to the satisfaction of the firm, by mortgages on residential property which is or shall be occupied or let by the owner or the beneficial owner in the case of personal investment companies must be assigned a risk weight of 35%.
[Note: BCD Annex VI Part 1 point 45]
- (1)
4A firm must not treat a lifetime mortgage as an exposure fully and completely secured on residential property for the purposes of BIPRU 3.4.56 R unless the amount of the exposure is calculated according to the following formula:
exposure amount =
where:
- (a)
P is the current outstanding balance on the lifetime mortgage;
- (b)
i is the interest rate charged on the lifetime mortgage, which for the purposes of this calculation must not be lower than the discount rate referred to in (c);
- (c)
d is the discount rate which is the risk-free rate as represented by the yield on 10-year UK government bonds; and
- (d)
T is the projected number of years to maturity of the exposure.
- (a)
- (2)
Notwithstanding (1)(c), a firm may calculate an annual average discount rate provided there is no obvious bias in its calculation and it is consistent in its approach.
- (1)
4This paragraph provides guidance on BIPRU 3.4.56A R.
- (2)
For the purposes of BIPRU 3.4.56A R (2), a firm may use the FTSE UK gilt 10-year yield index which the Council of Mortgage Lenders makes available to its members.
- (3)
If a firm offers a variable interest rate on a lifetime mortgage, it should calculate an average interest rate in a way which is consistent with the calculation of the discount rate.
- (4)
To determine the projected number of years to maturity of the exposure, a firm may use the standard mortality tables published by the Institute of Actuaries or the Faculty of Actuaries. For internal risk management purposes, the firm should use factual data or seek actuarial advice to determine how the information in these tables may be adjusted to take account of regional and other relevant variations.
Without prejudice to BIPRU 3.4.85 R, an exposure or any part of an exposure to a tenant under a property leasing transaction concerning residential property under which the firm is the lessor and the tenant has an option to purchase, must be assigned a risk weight of 35% provided that the firm is satisfied that the exposure of the firm is fully and completely secured by its ownership of the property.
[Note: BCD Annex VI Part 1 point 47]
An Ijara mortgage is an example of an exposure described in BIPRU 3.4.58 R.
- (1)
In the exercise of its judgement for the purposes of BIPRU 3.4.56 R to BIPRU 3.4.58 R, a firm may be satisfied only if the conditions in (2) to (6) are met.
- (2)
The value of the property does not materially depend upon the credit quality of the obligor. This requirement does not preclude situations where purely macroeconomic factors affect both the value of the property and the performance of the borrower.
- (3)
The risk of the borrower does not materially depend upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources. As such, repayment of the facility does not materially depend on any cash flow generated by the underlying property serving as collateral.
- (4)
The minimum requirements about:
- (a)
legal certainty in BIPRU 3.4.64 R;
- (b)
monitoring of property values in BIPRU 3.4.66 R;
- (c)
documentation in BIPRU 3.4.72 R; and
- (d)
insurance in BIPRU 3.4.73 R;
are met.
- (a)
- (5)
The valuation rules set out in BIPRU 3.4.77 R to BIPRU 3.4.80 R are met.
- (6)
The value of the property exceeds the exposures by a substantial margin as set out in BIPRU 3.4.81 R10, BIPRU 3.4.84 R or BIPRU 3.4.85 R (as applicable).
[Note: BCD Annex VI Part 1 point 48]
BIPRU 3.4.60 R (3) does not apply to exposures fully and completely secured by mortgages on residential property which is situated within the United Kingdom.
[Note: BCD Annex VI Part 1 point 49]
The FCA may disapply10 the condition in BIPRU 3.4.60 R (3), if it has evidence that a well-developed and long-established residential real estate market is present in the UK10 with loss rates which are sufficiently low to justify disapplying the condition in BIPRU 3.4.60R(3)10. BIPRU 3.4.61 R implements that option. However, if the evidence changes so that these conditions are no longer satisfied, the appropriate regulator may 10revoke BIPRU 3.4.61 R.
The requirements about legal certainty referred to in BIPRU 3.4.60 R (4)(a) are as follows:
- (1)
the mortgage or charge 3must be enforceable in all relevant jurisdictions which are relevant at the time of conclusion of the credit agreement, and the mortgage or charge 3must be properly filed on a timely basis;
33 - (2)
the arrangements must reflect a perfected lien (i.e. all legal requirements for establishing the pledge shall have been fulfilled); and
- (3)
the protection agreement and the legal process underpinning it must enable the firm to realise the value of the protection within a reasonable timeframe.
[Note: BCD Annex VIII Part 2 point 8(a)]
The term protection agreement in BIPRU 3.4.64 R (3) refers to the contract or deed by which the mortgage or charge is established.
- (1)
The requirements about monitoring of property values referred to in BIPRU 3.4.60 R (4)(b) are as follows:
- (a)
the value of the property must be monitored on a frequent basis and at a minimum once every three years for residential real estate;
- (b)
more frequent monitoring must be carried out where the market is subject to significant changes in conditions;
- (c)
statistical methods may be used to monitor the value of the property and to identify property that needs revaluation;
- (d)
the property valuation must be reviewed by an independent valuer when information indicates that the value of the property may have declined materially relative to general market prices; and
- (e)
for loans exceeding €3 million or 5% of the capital resources of the firm, the property valuation must be reviewed by an independent valuer at least every three years.
- (a)
- (2)
For the purposes of (1), 'independent valuer' means a person who possesses the necessary qualifications, ability and experience to execute a valuation and who is independent from the credit decision process.
[Note: BCD Annex VIII Part 2 point 8(b)]
A property will need to be revalued over time to ensure that the original purchase price does not overstate the degree of security provided by the property. Ijara providers should undertake revaluations in the same way as providers of conventional mortgages.
For the purposes of BIPRU 3.4.66 R (1)(a), the monitoring of property values should be an inherent part of risk managing and tracking the portfolio. The requirement to monitor property values does not include the physical assessment of each property in the portfolio.
For the purposes of BIPRU 3.4.66 R (1)(d) and (e), the review of a property valuation is more in-depth than the normal monitoring process required by BIPRU 3.4.66 R (1)(a). This requirement is likely to include a review of the property value on an individual exposure basis. Where an exposure is secured by multiple properties, the review can be undertaken at the level of the exposure, rather than at the level of each individual property.
The review of property values required by BIPRU 3.4.66 R (1)(e) may lead to an amendment of the value assigned to the property under by BIPRU 3.4.80 R.
For the purposes of BIPRU 3.4.66 R (2), necessary qualifications need not be professional qualifications but the firm should be able to demonstrate that he or she has the necessary ability and experience to undertake the review.
The requirements about documentation referred to in BIPRU 3.4.60 R (4)(c) are that the types of residential real estate accepted by the firm and its lending policies in this regard must be clearly documented.
[Note: BCD Annex VIII Part 2 point 8(c)]
The requirements about insurance referred to in BIPRU 3.4.60 R (4)(d) are that the firm must have procedures to monitor that the property taken as protection is adequately insured against damage.
[Note: BCD Annex VIII Part 2 point 8(d)]
For the purposes of BIPRU 3.4.73 R a firm should, as a minimum, ensure that it is a requirement of each loan that the property taken as collateral must have adequate buildings insurance at all times, which should be reviewed when any new loan is extended against the property.
The valuation rules referred to in BIPRU 3.4.60 R (5) are set out in BIPRU 3.4.77 R to BIPRU 3.4.80 R.
The property must be valued by an independent valuer at or less than the market value. In the UK where10 rigorous criteria for the assessment of the mortgage lending value exist10 in statutory or regulatory provisions 10property may instead be valued by an independent valuer at or less than the mortgage lending value.
[Note: BCD Annex VIII Part 3 point 62]
Market value means the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value must be documented in a transparent and clear manner.
[Note: BCD Annex VIII Part 3 point 63]
Mortgage lending value means the value of the property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property. Speculative elements must not be taken into account in the assessment of the mortgage lending value. The mortgage lending value must be documented in a transparent and clear manner.
[Note: BCD Annex VIII Part 3 point 64]
The value of the collateral must be the market value or mortgage lending value reduced as appropriate to reflect the results of the monitoring required under 2BIPRU 3.4.60 R (4)(b)2 and BIPRU 3.4.66 R and to take account of any prior claims on the property.
[Note: BCD Annex VIII Part 3 point 65]
A firm may not treat an exposure as fully and completely secured by residential property located in the United Kingdom for the purpose of BIPRU 3.4.56 R or BIPRU 3.4.58 R unless the amount of the exposure or of the secured part of the exposure referred to in BIPRU 3.4.56 R or BIPRU 3.4.58 R, as the case may be, is 80% or less of the value of the residential property on which it is secured.
- (1)
The application of BIPRU 3.4.81 R may be illustrated by an example. If a firm has a mortgage exposure of ÂŁ100,000 secured on residential property in the United Kingdom that satisfies the criteria listed in BIPRU 3.4.56 R to BIPRU 3.4.80 R and the value of that property is ÂŁ100,000, then ÂŁ80,000 of that exposure may be treated as fully and completely secured and risk weighted at 35%. The remaining ÂŁ20,000 may be risk weighted at 75% provided the exposure meets the criteria in BIPRU 3.2.10 R. The portion risk weighted at 75% should be treated as a retail exposure for the purposes of the aggregation calculations specified in BIPRU 3.2.10 R (3). A diagrammatic illustration of this example is in (2).
- (2)
- (3)
The same approach applies to exposures described in BIPRU 3.4.58 R. On initiation a 35% risk weight should be applied to the first 80% of the principal/"purchase price" outstanding, with a 75% risk weight being applied to the remainder of the principal (assuming that the exposure meets the requirements in BIPRU 3.2 to be treated as a retail exposure).
For the purposes of BIPRU 3.4.56 R or BIPRU 3.4.58 R, a firm may only treat an exposure as fully and completely secured by residential property situated in the territory of a third-country competent authority that is listed as equivalent for credit risk in BIPRU 8 Annex 6 R3 if it would be treated as fully and completely secured under the applicable requirements of that third-country competent authority (including any applicable loan-to-value ceiling).
3For the purposes of BIPRU 3.4.56 R or BIPRU 3.4.58 R, where the residential property in question is situated in the territory of a third-country competent authority that is not listed as equivalent for credit risk in BIPRU 8 Annex 3 R:
For the purposes of BIPRU 3.4.85 R (1) and in order to satisfy itself that an exposure is fully and completely secured by the relevant property, a firm should make its own assessment of the appropriate margin in each case, using its knowledge of the market in the relevant country and of its own portfolio.
If a firm has more than one exposure secured on the same property they should be aggregated and treated as if they were a single exposure secured on the property for the purposes of BIPRU 3.4.56 R and BIPRU 3.4.58 R and BIPRU 3.4.81 R10 and BIPRU 3.4.84 R.
If an exposure is secured on property that is used in part for residential purposes in accordance with BIPRU 3.4.56 R and partly for commercial purposes (such as a farm, public house, guest house or shop) it may be treated as secured by residential real estate if the firm can demonstrate that the property's main use is, or will be, residential and that the value of the property is not significantly affected by its commercial use.
Exposures secured by mortgages on commercial real estate
Exposures or any part of an exposure secured by mortgages on offices or other commercial premises which cannot properly be considered to fall within any other standardised credit risk exposure class or to qualify for a lower risk weight under BIPRU 3 must be assigned a risk weight of 100%.
[Note: BCD Annex VI Part 1 point 51]
Past due items
BIPRU 3.4.96 R to BIPRU 3.4.101 R set out the treatment to be accorded to past due items.
Without prejudice to the provisions contained in BIPRU 3.4.97 R to BIPRU 3.4.101 R, the unsecured part of any item that is past due for more than 90 days (irrespective of the amount of that item or of the unsecured portion of that item) must be assigned a risk weight of:
For the purpose of defining the secured portion of the past due item, eligible collateral and guarantees must be those eligible for credit risk mitigation purposes under BIPRU 5.
[Note: BCD Annex VI Part 1 point 62]
For the purposes of BIPRU 3.4.97 R, the secured portion of a past due item is dealt with under BIPRU 5 (Credit risk mitigation). A firm may treat the secured portion of an exposure covered by a mortgage indemnity product that meets the relevant CRM eligibility criteria as secured for the purposes of BIPRU 3.4.97 R. The risk weight to be applied to the secured portion is determined under BIPRU 5.7.21 R to BIPRU 5.7.24 R. The risk weight of the unsecured portion is determined in accordance with BIPRU 3.4.96 R.
Exposures indicated in BIPRU 3.4.56 R to BIPRU 3.4.61R10 (Exposures secured by mortgages on residential property) must be assigned a risk weight of 100% net of value adjustments if they are past due for more than 90 days. If value adjustments are no less than 20% of the exposure gross of value adjustments, the risk weight to be assigned to the remainder of the exposure is 50%.
[Note: BCD Annex VI Part 1 point 64]
The application of BIPRU 3.4.96 R and BIPRU 3.4.99 R may be illustrated on the basis of a ÂŁ110,000 loan on a property valued at ÂŁ100,000, where ÂŁ80,000 of the loan is secured and ÂŁ30,000 of the exposure is unsecured and provisions of ÂŁ20,000 are taken:
- (1)
Option 1 (application of BIPRU 3.4.96 R):
- (a)
provision of ÂŁ20,000 taken on ÂŁ80,000 secured exposure;
- (b)
provision exceeds 20%, so the firm should risk weight the remaining ÂŁ60,000 secured exposure at 50%;
- (c)
the risk weight to be applied to the unsecured exposure of ÂŁ30,000 is 150%1;
- (d)
the average risk weight to be assigned to the net exposure of ÂŁ90,000 is 83%.
- (a)
- (2)
Option 2 (application of BIPRU 3.4.99 R):
- (a)
provision of ÂŁ20,000 taken on ÂŁ30,000 unsecured exposure;
- (b)
provision exceeds 20%, so the firm should risk weight the remaining ÂŁ10,000 unsecured exposure at 100%;
- (c)
the risk weight to be applied to the secured exposure of ÂŁ80,000 is 100%;
- (d)
the average risk weight to be assigned to the net exposure of ÂŁ90,000 is 100%.
- (a)
Exposures indicated in BIPRU 3.4.89 R 10(Exposures secured by mortgages on commercial real estate) must be assigned a risk weight of 100% if they are past due for more than 90 days.
[Note: BCD Annex VI Part 1 point 65]
Non past due items to be assigned a 150% risk weight under BIPRU 3.4 and for which value adjustments have been established may be assigned a risk weight of:
- (1)
100% if value adjustments are no less than 20% of the exposure value gross of value adjustments; and
- (2)
50%, if value adjustments are no less than 50% of the exposure value gross of value adjustments.
[Note: BCD Annex VI Part 1 point 67]
Items belonging to regulatory high-risk categories
BIPRU 3.4.104 R sets out the treatment to be accorded to items belonging to regulatory high-risk categories.
Exposures listed in BIPRU 3 Annex 3 R must be assigned a risk weight of 150%.
[Note: BCD Annex VI Part 1 point 66]
The10 exposures listed in BIPRU 3 Annex 3 R are in the view of the appropriate regulator associated with particularly high risk.
Exposures in the form of covered bonds
BIPRU 3.4.107 R to BIPRU 3.4.110 R set out the treatment to be accorded to exposures in the form of covered bonds.
- (1)
Covered bonds means covered bonds as defined in the definition in the Glossary10 and collateralised by any of the following eligible assets:
- (a)
exposures to or guaranteed by the UK central government, the Bank of England,10 public sector entities, regional governments and local authorities in the UK10;
- (b)
- (i)
exposures to or guaranteed by non-UK10 central governments, non-UK10 central banks, multilateral development banks, international organisations that qualify for the credit quality step 1;
- (ii)
exposures to or guaranteed by non-UK10 public sector entities, non-UK10 regional governments and non-UK10 local authorities that are risk weighted as exposures to institutions or central governments and central banks according to BIPRU 3.4.23 R, BIPRU 3.4.24 R, BIPRU 3.4.10 R or BIPRU 3.4.16 G 10respectively and that qualify for the credit quality step 1; and
- (iii)
exposures in the sense of this point (b) that qualify as a minimum for the credit quality step 2, provided that they do not exceed 20% of the nominal amount of outstanding covered bonds of issuing institutions;
- (i)
- (c)
exposures to institutions that qualify for the credit quality step 1 but so that:
- (i)
the total exposure of this kind must not exceed 15% of the nominal amount of the outstanding covered bonds of the issuing credit institution;
- (ii)
exposures caused by transmission and management of payments of the obligors of, or liquidation proceeds in respect of, loans secured by real estate to the holders of covered bonds must not be comprised by the 15% limit; and
- (iii)
exposures to institutions in the EEA with a maturity not exceeding 100 days are not comprised by the step 1 requirement but those institutions must as a minimum qualify for credit quality step 2;
- (i)
- (d)
[deleted]10
- (e)
- (i)
[deleted]10
- (ii)
[deleted]10
77 - (iii)
a firm may recognise loans secured by commercial real estate as eligible where the loan to value ratio of 60% is exceeded up to a maximum level of 70% if the value of the total assets pledged as collateral for the covered bonds exceed the nominal amount outstanding on the covered bond by at least 10%, and the bondholders' claim meets the legal certainty requirements set out in BIPRU 3 and BIPRU 5; the bondholders' claim must take priority over all other claims on the collateral; 10
- (i)
- (f)
loans secured by ships where only liens that are combined with any prior liens within 60% of the value of the pledged ship.
- (a)
- (2)
[deleted]10
- (3)
For the purposes of BIPRU 3.4.107 R to BIPRU 3.4.110 R "collateralised" includes situations where the assets described in subpoints (1)(a) to (1)(f) are exclusively dedicated in law to the protection of the bond-holders against losses.
- (4)
[deleted]7
7 - (4A)
[deleted]10
7 - (5)
[deleted]10
[Note: BCD Annex VI Part 1 point 68]
A firm must for real estate collateralising covered bonds meet the minimum requirements set out in BIPRU 3.4.64 R to BIPRU 3.4.73 R and the valuation rules set out in BIPRU 3.4.77 R to BIPRU 3.4.80 R.
[Note: BCD Annex VI Part 1 point 69]
Notwithstanding BIPRU 3.4.107 R to BIPRU 3.4.108 R, covered bonds meeting the definition in the Glossary10 and issued before 31 December 2007 are also eligible for the preferential treatment until their maturity.
[Note: BCD Annex VI Part 1 point 70]
Covered bonds must be assigned a risk weight on the basis of the risk weight assigned to senior unsecured exposures to the credit institution which issues them. The following correspondence between risk weights applies:
- (1)
if the exposures to the institution are assigned a risk weight of 20%, the covered bond must be assigned a risk weight of 10%;
- (2)
if the exposures to the institution are assigned a risk weight of 50%, the covered bond must be assigned a risk weight of 20%;
- (3)
if the exposures to the institution are assigned a risk weight of 100%, the covered bond must be assigned a risk weight of 50%; and
- (4)
if the exposures to the institution are assigned a risk weight of 150%, the covered bond must be assigned a risk weight of 100%.
[Note: BCD Annex VI Part 1 point 71]
Items representing securitisation positions
Risk weighted exposure amounts for securitisation positions must be determined in accordance with BIPRU 9.
[Note: BCD Annex VI Part 1 point 72]
Exposures to institutions and corporates with a short-term credit assessment6
Exposures to institutions where BIPRU 3.4.34 R to BIPRU 3.4.39 R apply, and exposures to corporates6 for which a short-term credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.113 R in accordance with the mapping by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
[Note: BCD Annex VI Part 1 point 73]
Table: Exposures to institutions where BIPRU 3.4.34 R to BIPRU 3.4.39 R apply, and exposures to corporates for which a short-term credit assessment by a nominated ECAI is available6
Exposures in the form of collective investment undertakings (CIUs)
BIPRU 3.4.115 R to BIPRU 3.4.125 R set out the treatment to be accorded to exposures in the form of CIUs.
Without prejudice to BIPRU 3.4.116 R to BIPRU 3.4.125 R, exposures in CIUs must be assigned a risk weight of 100%.
[Note: BCD Annex VI Part 1 point 74]
Exposures in the form of CIUs for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.117 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
[Note: BCD Annex VI Part 1 point 75]
Table: Exposures in the form of CIUs for which a credit assessment by a nominated ECAI is available
This table belongs to BIPRU 3.4.116 R.
1 |
2 |
3 |
4 |
5 |
6 |
|
20% |
50% |
100% |
100% |
150% |
150% |
Where a firm considers that a position in a CIU is associated with particularly high risks it must assign that position a risk weight of 150%.
[Note: BCD Annex VI Part 1 point 76]
A firm should consider a CIU as being high risk where there is no external credit assessment from an eligible ECAI and where the CIU has specific features (such as high levels of leverage or lack of transparency) that prevent it from meeting the eligibility criteria laid out in BIPRU 3.4.121 R.
Other examples of high risk CIUs are: one in which a substantial element of the CIU's property is made up of items that would attract a risk weight of over 100%; or one whose mandate (as referred to in BIPRU 3.4.124 R) would permit it to invest in a substantial amount of such items.
Where BIPRU 3.4.116 R does not apply, a firm may determine the risk weight for a CIU as set out in BIPRU 3.4.123 R to BIPRU 3.4.125 R, if the following eligibility criteria are met:
- (1)
one of the following conditions is satisfied:
- (a)
the CIU is managed by a company which is subject to supervision in the UK10; or
- (b)
the following conditions are satisfied:
- (i)
the CIU is managed by a company which is subject to supervision that is equivalent to that laid down in UK10 law; and
55 - (ii)
cooperation between competent authorities and third country competent authorities10 is sufficiently ensured; and
- (i)
- (a)
- (2)
the CIU's prospectus or equivalent document includes:
- (a)
the categories of assets in which the CIU is authorised to invest; and
- (b)
if investment limits apply, the relative limits and the methodologies to calculate them; and
- (a)
- (3)
the business of the CIU is reported on at least an annual basis to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period.
[Note: BCD Annex VI Part 1 point 77]
Where a firm is aware of the underlying exposures of a CIU, it may look through to those underlying exposures in order to calculate an average risk weight for the CIU in accordance with the standardised approach.
[Note: BCD Annex VI Part 1 point 79]
Where a firm is not aware of the underlying exposures of a CIU, it may calculate an average risk weight for the CIU in accordance with the standardised approach subject to the following rules: it will be assumed that the CIU first invests, to the maximum extent allowed under its mandate, in the standardised credit risk exposure classes attracting the highest capital requirement, and then continues making investments in descending order until the maximum total investment limit is reached.
[Note: BCD Annex VI Part 1 point 80]
A firm may rely on a third party to calculate and report, in accordance with the methods set out in BIPRU 3.4.123 R to BIPRU 3.4.124 R, a risk weight for the CIU provided that the correctness of the calculation and report is adequately ensured.
[Note: BCD Annex VI Part 1 point 81]
Other items
BIPRU 3.4.127 R to BIPRU 3.4.133 R set out the treatment to be accorded to other items as referred to in BIPRU 3.2.9 R (16).
Treatment
Tangible assets within the meaning of Article 4(10) of the Bank Accounts Directive must be assigned a risk weight of 100%.
[Note: BCD Annex VI Part 1 point 82]
Prepayments and accrued income for which a firm is unable to determine the counterparty in accordance with the Bank Accounts Directive, must be assigned a risk weight of 100%.
[Note: BCD Annex VI Part 1 point 83]
Cash items in the process of collection must be assigned a 20% risk weight. Cash in hand and equivalent cash items must be assigned a 0% risk weight.
[Note: BCD Annex VI Part 1 point 84]
Holdings of equity and other participations except where deducted from capital resources must be assigned a risk weight of at least 100%.
[Note: BCD Annex VI Part 1 point 86]
Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities must be assigned a 0% risk weight.
[Note: BCD Annex VI Part 1 point 87]
In the case of asset sale and repurchase agreements and outright forward purchases, the risk weight must be that assigned to the assets in question and not to the counterparties to the transactions.
[Note: BCD Annex VI Part 1 point 88]
Where a firm provides credit protection for a number of exposures under terms that the nth default among the exposures triggers payment and that this credit event terminates the contract, and where the product has an external credit assessment from an eligible ECAI the risk weights prescribed in BIPRU 9 must be assigned. If the product is not rated by an eligible ECAI, the risk weights of the exposures included in the basket must be aggregated, excluding n-1 exposures, up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk weighted asset amount. The n-1 exposures to be excluded from the aggregation must be determined on the basis that they include those exposures each of which produces a lower risk weighted exposure amount than the risk weighted exposure amount of any of the exposures included in the aggregation.
[Note: BCD Annex VI Part 1 point 89]
The exposure value for leases must be the discounted minimum lease payments. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make and any bargain option (i.e. an option the exercise of which is reasonably certain). Any guaranteed residual value fulfilling the set of conditions in BIPRU 5.7.1 R (Eligibility), regarding the eligibility of protection providers as well as the minimum requirements for recognising other types of guarantees provided in BIPRU 5.7.6 R (Minimum requirements: General) to BIPRU 5.7.12 R(Additional requirements for guarantees) must also be included in the minimum lease payments. These exposures must be assigned to the relevant exposure class in accordance with BIPRU 3.2.9 R, BIPRU 3.2.10 R, BIPRU 3.2.11 R, BIPRU 3.2.12 R, BIPRU 3.2.13 R and BIPRU 3.2.14 G. When the exposure is a residual value of leased properties, the risk weighted exposure amounts must be calculated as follows:
1/t * 100% * exposure value;
where t is the greater of 1 and the nearest number of whole years of the lease term remaining.
[Note: BCD Annex VI Part 1, point 90]