BIPRU 3.5 Simplified method of calculating risk weights
This section (BIPRU 3.5) sets out a simplified approach to calculating risk weights. This approach is only relevant to an exposure class for which risk weights are determined by the ratings of a nominated ECAI or an export credit agency. For other exposure classes a firm should use the normal approach under the standardised approach.
The approach in this section is only likely to be relevant for a limited licence firm or a limited activity firm that has only incidental credit exposures and for whom it would be prohibitively costly to establish the systems needed to include the credit assessments of ECAIs and export credit agencies in its regulatory capital calculations. However the approach may be used by other firms if appropriate. A firm should notify the appropriate regulator if it adopts the approach in this section.
Rather than risk weighting exposures individually, a firm eligible to apply the simplified approach should apply a single risk weight to all exposures in each exposure class. The simplified risk weight for exposures in a particular class will be the risk weighting for unrated entities for each exposure class in which the external credit assessments influence risk weights.
The table in BIPRU 3.5.5 G has a summary of the risk weights that a firm should use if it uses the simplified method of calculating risk weights referred to in BIPRU 3.5.1 G.
Table : Simplified method of calculating risk weights
This table belongs to BIPRU 3.5.4 G.
Exposure class |
Exposure sub-class |
Risk weights |
Comments |
Central government |
Exposures to United Kingdom government or Bank of England in sterling |
0% |
|
Exposures to central governments or central banks of certain countries outside the UK3 in currency of that country |
See next column |
The risk weight is whatever it is under local law. See BIPRU 3.4.6 R for precise details. |
|
Other exposures |
100% |
||
Regional/local governments |
Exposures to the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly in sterling |
0% |
|
Exposures to local or regional governments of certain countries outside the UK3 in currency of that country |
0% |
See BIPRU 3.4.19 R for details of type of local/regional government covered. See Note.3 |
|
Exposures to United Kingdom local/regional government in sterling3 if the exposure has original effective maturity of 3 months or less |
20% |
||
Exposures to local or regional governments of countries outside the UK3 in currency of that country if the exposure has original effective maturity of 3 months or less |
20% |
See Note.3 |
|
Other exposures |
100% |
||
Exposures to a PSE of the United Kingdom if that PSE is guaranteed by central government and if the exposure is in sterling3. |
0% |
BIPRU 3.4.24 R describes the United Kingdom PSEs covered3. |
|
Exposures to PSE of a country outside the UK3 if that PSE is guaranteed by the country's central government and if the exposure is in currency of that country. |
0% |
See BIPRU 3.4.26 R and Note.3 |
|
Exposures to a PSE of the United Kingdom in sterling3 if the exposure has original effective maturity of 3 months or less |
20% |
||
Exposures to PSE of a country outside the UK3 in currency of that country if the exposure has original effective maturity of 3 months or less |
20% |
See Note3. |
|
Other exposures |
100% |
||
Exposures to multilateral development banks listed in paragraph (1) of the Glossary definition |
0% |
Simplified approach does not apply. Normal rules apply. |
|
Other exposures |
Various |
Treated as an institution |
|
EU2, The3 International Monetary Fund and the Bank for International Settlements 2 |
0% |
Simplified approach does not apply. Normal rules apply. |
|
Exposures to United Kingdom institution in sterling with original effective maturity of three months or less |
20% |
||
Exposures to institution with a head office in a country outside the UK3 in the currency of that country with original effective maturity of three months or less |
20% |
See Note3. |
|
Exposures to United Kingdom institution in sterling with original effective maturity of over three months |
50% |
||
| 1 | |||
| 1 | |||
Exposures to institution with a head office in a country outside the UK3 in the currency of that country with original effective maturity of over three1 months |
50% |
See Note3. |
|
Other exposures |
100% |
||
100% |
|||
75% |
Simplified approach does not apply. Normal rules apply. |
||
Mortgages on residential or commercial property |
Various |
Simplified approach does not apply. Normal rules apply. |
|
Past due items |
Various |
Simplified approach does not apply. Normal rules apply. |
|
High risk items |
150% |
Simplified approach does not apply. Normal rules apply. |
|
Various |
Risk weights are based on the risk weight of issuer as described in BIPRU 3.4.110 R. The risk weight of the issuer for this purpose should be calculated under the simplified approach. |
||
Generally 1250%. May look through to underlying exposures if BIPRU 9 allows. |
Use the BIPRU 9 rules for unrated exposures under the standardised approach |
||
Short term exposures with rating |
See BIPRU 3.4.112 R. Not applicable as uses ECAI ratings. |
||
May look through to underlying under BIPRU 3.4.123 R |
Various |
Simplified approach does not apply. Normal rules apply. May use simplified approach to underlying if simplified approach applies to underlying. |
|
May use average risk weight under BIPRU 3.4.124 R |
Various |
Simplified approach does not apply. Normal rules apply. May use simplified approach to underlyings if simplified approach applies to underlying. |
|
High risk under BIPRU 3.4.118 R |
150% |
Simplified approach does not apply. Normal rules apply. |
|
Others |
100% |
||
Other items under BIPRU 3.2.9 R (16) |
Various |
Simplified approach does not apply. Normal rules apply. |
|
Note3: The risk weight should not be lower than the risk weight that applies for national currency exposures of the central government of the third country in question under BIPRU 3.5. That means that this risk weight only applies if the third country is one of those to which BIPRU 3.4.6 R (Preferential risk weight for exposures of the central government of countries outside the UK3 that apply equivalent prudential standards) applies. |
|||
If an exposure is guaranteed and if under BIPRU 5 the firm may treat the exposure as being to the guarantor, the simplified approach may be used for the guarantor. The key provisions are BIPRU 5.7.23 R to BIPRU 5.7.25 R.
If an exposure is collateralised and if under BIPRU 5 the firm may recognise the collateral, the simplified approach may be used to determine the risk weight to be applied to the collateralised exposure. The key provisions are BIPRU 5.4.18 R to BIPRU 5.4.21 R.
If a firm does not nominate one or more eligible ECAIs as referred to in BIPRU 3.6.4 R the firm must not use the financial collateral comprehensive method.