1 BIPRU 3 applies to a BIPRU firm.

The credit risk capital component of a firm is 8% of the total of its risk weighted exposure amounts for exposures falling into BIPRU 3.1.6 R, calculated in accordance with BIPRU 3.

An exposure falls into this rule if:

1. (1)

   it is in a firm'snon-trading book;and

2. (2)

   it has not been deducted from the firm'scapital resources under GENPRU 2.2.

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 securitisedexposures 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 provided that the following conditions are met:

   2
   1. (a)

      the counterparty is

      2
      1. (i)

         a core concentration risk group counterparty; and2

         2
      2. (ii)

         an institution,2financial holding company, mixed financial holding company,3financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements;

   2. (b)

      [deleted]2

      2
   3. (ba)

      (in relation to a subsidiary undertaking) 100% of the voting rights attaching to the shares in the counterparty's capital is held by the firm or a financial holding company (or a subsidiary undertaking of the financial holding company), whether individually or jointly, and that the firm or financial holding company (or its subsidiary undertaking) must have the right to appoint or remove a majority of the members of the board of directors, committee of management or other governing body of the counterparty; 2

   4. (c)

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

   5. (d)

      the counterparty is incorporated in the United Kingdom ; and

      22
   6. (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)]2

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)

   2For the purpose of BIPRU 3.2.25R (1)(e), a firm must be able on an ongoing basis to demonstrate fully to the appropriate regulator the circumstances and arrangements, including legal arrangements, by virtue of which there are no material practical or legal impediments, and none are foreseen, to the prompt transfer of capital resources or repayment of liabilities from the counterparty to the firm.

2. (2)

   In relation to a counterparty that is not a firm, the arrangements referred to in (1) must include a legally binding agreement with each firm that is a member of the core UK group that it will promptly on demand by the firm increase the firm'scapital resources by an amount required to ensure that the firm complies with GENPRU 2.1 (Calculation of capital resources requirements) and any other requirements relating to capital resources or concentration risk imposed on a firm by or under the regulatory system.

   4
3. (3)

   4For the purpose of (2), the obligation to increase the firm'scapital resources may be limited to capital resources available to the counterparty and may reasonably exclude such amount of capital resources that, if transferred to the firm, would cause the counterparty to become balance sheet insolvent in the manner contemplated in section 123(2) of the Insolvency Act 1986.

1. (1)

   A firm may not apply BIPRU 3.2.25 R unless it has a core UK group waiver.2

   2
2. (2)

   [deleted]2

   2
3. (3)

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

4. (4)

   [deleted]2

   2
5. (5)

   A firm must notify the appropriate regulator 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]

An external credit assessment may be used to determine the risk weight of an exposure in accordance with BIPRU 3.2.20 R to BIPRU 3.2.26 R only if the ECAI which provides it is recognised by the appropriate regulator as an eligible ECAI for the purposes of the standardised approach to credit risk.

[Note: BCD Article 81(1)]

The credit quality step with which a relevant credit assessment of an eligible ECAI is to be associated is that in the table mapping the credit assessments of eligible ECAIs to credit quality steps published by the appropriate regulator under Regulation 22(3) of the Capital Requirements Regulations 2006.

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]

Exposures to the European Central Bank must be assigned a 0% risk weight.

[Note: BCD Annex VI Part 1 point 3]

Exposures to the central government of the UK and the Bank of England10 denominated and funded in sterling10 must be assigned a risk weight of 0%.

[Note: BCD Annex VI Part 1 point 4]

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]

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. (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. (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]

Without prejudice to BIPRU 3.4.15 R to BIPRU 3.4.19 R:

1. (1)

   a firm must risk weightexposures to regional governments and local authorities in accordance with BIPRU 3.4.11 R to BIPRU 3.4.14 R10; and

   8
2. (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]

1. (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. (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]

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]

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 weightexposures to such regional governments and local authorities in the same manner.

[Note: BCD Annex VI Part 1 point 11]

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.

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]

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 weightexposures to the relevant public sector entities in the same manner.

[Note: BCD Annex VI Part 1 point 17]

Without prejudice to BIPRU 3.4.28 R to BIPRU 3.4.29 R:

1. (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. (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]

Exposures to the following international organisations must be assigned a 0% risk weight:

1. (1)

   the EU;5

   5
2. (2)

   the International Monetary Fund; and

3. (3)

   the Bank for International Settlements.

   [Note: BCD Annex VI Part 1 point 22]

BIPRU 3.4.32 R to BIPRU 3.4.47R10 set out the treatment to be accorded to exposures to institutions.

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 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 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]

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]

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]

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]

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. (1)

   [deleted]10

2. (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]

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 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]

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]

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]

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]

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. (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:

   1. (a)

      P is the current outstanding balance on the lifetime mortgage;

   2. (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);

   3. (c)

      d is the discount rate which is the risk-free rate as represented by the yield on 10-year UK government bonds; and

   4. (d)

      T is the projected number of years to maturity of the exposure.

2. (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.

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]

1. (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. (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. (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. (4)

   The minimum requirements about:

   1. (a)

      legal certainty in BIPRU 3.4.64 R;

   2. (b)

      monitoring of property values in BIPRU 3.4.66 R;

   3. (c)

      documentation in BIPRU 3.4.72 R; and

   4. (d)

      insurance in BIPRU 3.4.73 R;

   are met.

5. (5)

   The valuation rules set out in BIPRU 3.4.77 R to BIPRU 3.4.80 R are met.

6. (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 requirements about legal certainty referred to in BIPRU 3.4.60 R (4)(a) are as follows:

1. (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. (2)

   the arrangements must reflect a perfected lien (i.e. all legal requirements for establishing the pledge shall have been fulfilled); and

3. (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)]

1. (1)

   The requirements about monitoring of property values referred to in BIPRU 3.4.60 R (4)(b) are as follows:

   1. (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;

   2. (b)

      more frequent monitoring must be carried out where the market is subject to significant changes in conditions;

   3. (c)

      statistical methods may be used to monitor the value of the property and to identify property that needs revaluation;

   4. (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

   5. (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.

2. (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)]

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)]

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.

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).

For 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:

1. (1)

   a firm must not treat an exposure as fully and completely secured by the residential property in question unless the value of the property exceeds the exposures by a substantial margin, which must be at least 20%;

2. (2)

   the firm must apply a risk weight of 50% to the exposure.

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]

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:

1. (1)

   150% if value adjustments are less than 20% of the unsecured part of the exposure gross of value adjustments; and

2. (2)

   100% if value adjustments are no less than 20% of the unsecured part of the exposure gross of value adjustments.

   [Note: BCD Annex VI Part 1 point 61]

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]

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]

Exposures indicated in BIPRU 3.4.89 R10(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. (1)

   100% if value adjustments are no less than 20% of the exposure value gross of value adjustments; and

2. (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]

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]

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. (1)

   Covered bonds means covered bonds as defined in the definition in the Glossary10 and collateralised by any of the following eligible assets:

   1. (a)

      exposures to or guaranteed by the UK central government, the Bank of England,10public sector entities, regional governments and local authorities in the UK10;

   2. (b)
      1. (i)

         exposures to or guaranteed by non-UK10 central governments, non-UK10central banks, multilateral development banks, international organisations that qualify for the credit quality step 1;

      2. (ii)

         exposures to or guaranteed by non-UK10public 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 G10respectively and that qualify for the credit quality step 1; and

      3. (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;

   3. (c)

      exposures to institutions that qualify for the credit quality step 1 but so that:

      1. (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;

      2. (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

      3. (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;

   4. (d)

      [deleted]10

   5. (e)
      1. (i)

         [deleted]10

      2. (ii)

         [deleted]10

         77
      3. (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

   6. (f)

      loans secured by ships where only liens that are combined with any prior liens within 60% of the value of the pledged ship.

2. (2)

   [deleted]10

3. (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. (4)

   [deleted]7

   7
5. (4A)

   [deleted]10

   7
6. (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. (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. (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. (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. (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]

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 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]

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]

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]

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. (1)

   one of the following conditions is satisfied:

   1. (a)

      the CIU is managed by a company which is subject to supervision in the UK10; or

   2. (b)

      the following conditions are satisfied:

      1. (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
      2. (ii)

         cooperation between competent authorities and third country competent authorities10 is sufficiently ensured; and

2. (2)

   the CIU's prospectus or equivalent document includes:

   1. (a)

      the categories of assets in which the CIU is authorised to invest; and

   2. (b)

      if investment limits apply, the relative limits and the methodologies to calculate them; and

3. (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]

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).

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]

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.

The use of ECAI credit assessments for the calculation of a firm'srisk weighted exposure amounts must be consistent and in accordance with BIPRU 3.61. Credit assessments must not be used selectively.

[Note: BCD Article 83(1)]

Where the appropriate regulator's recognition of an ECAI is not limited to its solicited credit assessments, a firm may use an unsolicited credit assessment of an eligible ECAI for the calculation of a firm'srisk weighted exposure amounts.

[Note: BCD Article 83(2)]

A firm may nominate one or more eligible ECAIs to be used for the determination of risk weights to be assigned to asset and off-balance sheet items.

[Note: BCD Annex VI Part 3 point 1]

A firm which decides to use the credit assessments produced by an eligible ECAI for a certain class of items must use those credit assessments consistently for all exposures belonging to that class.

[Note: BCD Annex VI Part 3 point 2]

A firm which decides to use the credit assessments produced by an eligible ECAI must use them in a continuous and consistent way over time.

[Note: BCD Annex VI Part 3 point 3]

A firm can only use ECAIs' credit assessments that take into account all amounts both in principal and in interest owed to it.

[Note: BCD Annex VI Part 3 point 4]

If only one credit assessment is available from a nominated ECAI for a rated item, that credit assessment must be used to determine the risk weight for that item.

[Note: BCD Annex VI Part 3 point 5]

If two credit assessments are available from nominated ECAIs and the two correspond to different risk weights for a rated item, the higher risk weight must be applied.

[Note: BCD Annex VI Part 3 point 6]

If more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating the two lowest risk weights must be referred to. If the two lowest risk weights are different, the higher risk weight must be assigned. If the two lowest risk weights are the same, that risk weight must be assigned.

[Note: BCD Annex VI Part 3 point 7]

1. (1)

   If a firm has decided to make use of the credit assessments of export credit agencies, when risk weightingexposures to central governments or central banks, if two or more credit assessments are available to a firm from export credit agencies or if credit assessments are available to a firm from both nominated ECAIs and export credit agencies, the firm must adopt the approach in this rule.

2. (2)

   If two credit assessments are available and correspond to different risk weights for a rated item, the higher risk weight must be applied.

3. (3)

   If more than two credit assessments are available for a rated item, the assessments generating the two lowest risk weights must be referred to:

   1. (a)

      if the two lowest risk weights are the same, that risk weight must be applied; or

   2. (b)

      if the two lowest risk weights are different, the higher of the two must be applied.

4. (4)

   If a firm does not for the purposes of BIPRU 3 make any use of the consensus risk scores referred to in BIPRU 3.4.7 R (1) it may treat those scores as not being available to it for the purpose of this rule. Likewise, if a firm does not for the purposes of BIPRU 3 make any use of the credit assessments of a particular export credit agency as referred to in BIPRU 3.4.7 R (2) it may treat those assessments as not being available to it for the purpose of this rule.

Where a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure belongs, this credit assessment must be used to determine the risk weight to be assigned to that item.

[Note: BCD Annex VI Part 3 point 8]

Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, then that credit assessment must be used if it produces a higher risk weight than would otherwise be the case or if it produces a lower risk weight and the exposure in question ranks pari passu or senior in all respects to the specific issuing program or facility or to senior unsecured exposures of that issuer as relevant.

[Note: BCD Annex VI Part 3 point 9]

BIPRU 3.6.12 R and BIPRU 3.6.13 R are not to prevent the application of BIPRU 3.4.107 R to BIPRU 3.4.110 R (Exposures in the form of covered bonds).

[Note:BCD Annex VI Part 3 point 10]

Credit assessments for issuers within a corporate group cannot be used as credit assessment of another issuer within the same corporate group.

[Note: BCD Annex VI Part 3 point 11]

Short-term credit assessments may only be used for short-term asset and off-balance sheet items constituting exposures to institutions and corporates.

[Note: BCD Annex VI Part 3 point 12]

Any short-term credit assessment may only apply to the item the short-term credit assessment refers to, and it must not be used to derive risk weights for any other item.

[Note: BCD Annex VI Part 3 point 13]

Notwithstanding BIPRU 3.6.17 R, if a short-term rated facility is assigned a 150% risk weight, then all unrated unsecured exposures on that obligor whether short-term or long-term must also be assigned a 150% risk weight.

[Note: BCD Annex VI Part 3 point 14]

Notwithstanding BIPRU 3.6.17 R, if a short-term rated facility is assigned a 50% risk weight, no unrated short-term exposure may be assigned a risk weight lower than 100%.

[Note: BCD Annex VI Part 3 point 15]

A credit assessment that refers to an item denominated in the obligor's domestic currency cannot be used to derive a risk weight for another exposure on that same obligor that is denominated in a foreign currency.

[Note: BCD Annex VI Part 3 point 16]

Notwithstanding BIPRU 3.6.20 R, when an exposure arises through a firm's participation in a loan that has been extended by a multilateral development bank whose preferred creditor status is recognised in the market, the credit assessment on the obligors' domestic currency item may be used for risk weighting purposes.

[Note: BCD Annex VI Part 3 point 17]

In accordance with BIPRU 3.2.1 R (2) and BIPRU 3.2.2 R, a firm must:

1. (1)

   assign an off-balance sheet item listed in the table in BIPRU 3.7.2 R to the risk category indicated in column 1 of that table; and

2. (2)

   determine the exposure value of that item as the percentage of its value for the appropriate risk category as set out in column 3 of the table in BIPRU 3.7.2 R.