BIPRU TP 2 Capital floors for a firm using the IRB approach5

1Application

2.1

R

Subject to BIPRU TP 2.2R, this section applies to a BIPRU firm that applies the IRB approach.

2.2

R

BIPRU TP 2.30R to BIPRU TP 2.34G apply to any firm to which BIPRU 8 (Group risk - consolidation) applies and which applies the IRB approach on a consolidated basis.

Purpose

2.3

G

Pursuant to the third paragraph of article 95(2) of the EU CRR, this5 section in part2 implements Articles 152(1) - (7) of the Banking Consolidation Directive and Article 43 of the Capital Adequacy Directive.

2.4

G

The purpose of this section is to limit the amount of capital reduction arising from the implementation of the Banking Consolidation Directive and the Capital Adequacy Directive compared with the requirements arising from the previous versions of those Directives. As such it is effectively a comparison of the capital resource requirements arising from BIPRU with those arising from the appropriate IPRU sourcebook that would have applied as at 31 December 2006. However the effect of changes to the market risk requirements is removed by requiring BIPRU 7 (Market risk) to be used for both sides of the comparison.

How to apply the capital floors

2.5

G

This section does not require a firm to continue to have capital resources equal to a fixed percentage of the capital requirement that applied to it as at 31 December 2006. Instead a firm should apply the requirements in this section to its business as it changes over time. So for example if a firm is calculating its capital requirements as at 31 December 2008 it will have two calculations. The first is carried out under BIPRU and GENPRU. The second is carried out under IPRU and this section. Both sets of requirements are applied to the firm's figures as at 31 December 2008.

2.6

G

The Directive provisions on which this section is based are written as a floor on a firm's capital resources requirement. This section however is written as a second capital resources requirement that sits beside the general capital resources requirements of BIPRU and GENPRU. The reason for this is that a firm should meet the general capital resources requirements of BIPRU and GENPRU using capital resources calculated under GENPRU 2.2 (Capital resources). On the other hand a firm should meet the capital resources requirements of this section (which are based on IPRU) using the relevant IPRU definition. In practice the two sets of definitions of capital resources are similar apart from the provisions about expected loss. Therefore as shown by the example in BIPRU TP 2.12G and BIPRU TP 2.13G, in practice a firm is subject to a single capital resources requirement.

2.7

G

[deleted]5

Capital floors: solo

2.8

R

A firm calculating risk weighted exposure amounts in accordance with the IRB approach must during the following2 twelve-month periods after 31 December 2006 provide capital resources that equal or exceed the following amounts:

(1)

for the first twelve-month period, 95%;

(2)

for the second twelve-month period, 90%; and

(3)

for the third and each subsequent2 twelve-month period, 80%;

of the solo capital resources requirement that applies to the firm under whichever part of IPRU applies under BIPRU TP 1.4R.

2.9

R

[deleted]5

Capital resources: solo

2.10

R

A firm must calculate its capital resources in accordance with whichever part of IPRU applies under BIPRU TP 1.4R.

2.11

R

Compliance with the requirements of this section must be on the basis of amounts of capital resources fully adjusted to reflect differences in the calculation of capital resources under IPRU and the calculation of capital resources under GENPRU and BIPRU deriving from the separate treatments of expected loss and unexpected loss under the IRB approach.

4Waiver from IPRU capital resources requirement

42.11A

G

Article 152(5d) and (5e) of the Banking Consolidation Directive allows the appropriate regulator to waive the capital floor calculation based on the IPRU capital resources requirement in BIPRU TP 2.8R(3) on a case-by-case basis only if a firm started to use the IRB approach on or after 1 January 2010. The appropriate regulator will consider an application for such a waiver in the light of the criteria in section 138A of the Act (Modification or waiver of rules).

42.11B

R

If a firm has a waiver referred to in BIPRU TP 2.11AG, it must provide capital resources that equal or exceed 80% of the capital resources requirement that the firm would be required to provide under the relevant sections of BIPRU applicable to it immediately before it started to use the IRB approach as those sections were in force on 31 December 2010.

2.12

G

[deleted]5

2.13

G

[deleted]5

Adjustments to the calculation of capital resources

2.14

R

A firm may treat any capital instrument that complies with the requirements of GENPRU 2.2 (Capital resources) as complying with the corresponding requirements of IPRU.

2.15

G

An example of BIPRU TP 2.14R is that a firm may treat subordinated debt with a term of five years or over that qualifies as lower tier two capital for the purposes of GENPRU as complying with the corresponding provisions for five year subordinated debt under IPRU.

Market risk

2.16

R

A firm must substitute the requirements in BIPRU for the calculation of the market risk capital requirement (excluding those provisions to the extent that they would involve using the IRB approach) for the corresponding provisions of IPRU.

2.17

G

BIPRU TP 4 to BIPRU TP 9 (Pre CRD capital requirements applying on a solo basis during 2007) explain which parts of IPRU correspond to the market risk capital requirement.

CAD 1 model and VaR model

2.18

R

If a firm has a CAD 1 permission or a VaR model permission it must also use it for the purposes of the capital floor calculations in this section.

2.19

G

In applying BIPRU TP 2.18R, a firm should not adjust the CAD 1 permission approach or VaR model approach (including the scope of the CAD 1 permission or VaR model permission) so that it is consistent with Directive 93/6 (the Capital Adequacy Directive) as it stood on 31 December 2006.

Individual capital guidance

2.20

R

[deleted]5

2.21

G

Any further capital resource requirements that a firm is required to meet under GENPRU 1.2 (Adequacy of financial resources) (i.e. Pillar 2) should not be taken into account.

How to apply IPRU

2.22

R

If the part of IPRU that applies to a firm applies different calculations to different types of firm the firm must use the calculations that it would have to use under BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007) as applicable before its expiry5.

2.23

R

If the part of IPRU that applies to a firm gives the firm a choice between methods of calculating capital resources or capital resources requirements it must exercise that choice consistently with the corresponding choices it makes in calculating capital resources or capital resources requirement under GENPRU and BIPRU.

2.24

G

BIPRU TP 4 to BIPRU TP 9 (Pre CRD capital requirements applying on a solo basis during 2007) as applicable before their expiry5 explain how concepts in IPRU and GENPRU map onto the ones in IPRU. This will enable a firm to decide which calculations it should use for the purposes of BIPRU TP 2.22R and BIPRU TP 2.23R.

2.25

G

[deleted]5

2.26

R

[deleted]5

2.27

G

The concentration risk capital component is the capital requirement for a firm that chooses to have trading book exposures that exceed the large exposure3 limits for the non-trading book. In most cases IPRU has a similar capital requirement. The purpose of BIPRU TP 2.26R is to allow a firm to calculate the amount of the excess trading book exposures for which it calculates the additional capital charge using BIPRU 10 3(Large exposures3 requirements) in order to avoid having to apply the IPRU large exposure requirements for this purpose only.

2.28

R

The calculations under this section do not take into account the base capital resources requirement or the part of the IPRU solo capital resources requirement that corresponds to the base capital resources requirement.

Solo consolidation

2.29

R

If a firm has a solo consolidation waiver it also applies for the purpose of this section in place of any corresponding provision of IPRU.

Capital floors: consolidation

2.30

R

If a firm calculates risk weighted exposure amounts on a consolidated basis in accordance with the IRB approach on a consolidated basis, BIPRU TP 2.8R to BIPRU TP 2.27G apply on a consolidated basis in accordance with BIPRU TP 2.30R to BIPRU TP 2.31R.

2.31

R

A firm must calculate the consolidation requirements under BIPRU TP 2.30R for the group in question (the group in question is specified in BIPRU TP 2.32R) in accordance with the following:

(1)

[deleted]5

(2)

[deleted]5

(3)

if the group is an investment firm group as defined in BIPRU TP 1.7R, chapter 14 of IPRU(INV) applies.

2.32

R

The scope of the consolidation under BIPRU TP 2.30R and any exemption from consolidation is determined in accordance with BIPRU 8 (Group risk - consolidation) rather than IPRU. In particular, the following adjustments apply:

(1)

if a firm is a member of a UK consolidation group and applies the IRB approach with respect to that UK consolidation group, BIPRU TP 2.30R applies with respect to that UK consolidation group; and

(2)

if a firm is a member of a non-EEA sub-group and applies the IRB approach with respect to that non-EEA sub-group, BIPRU TP 2.30R applies with respect to that non-EEA sub-group.

2.33

G

If for example the consolidation rules that apply for the purposes of this section are those in chapter 14 of IPRU(INV) (Consolidated supervision of investment firms) then IPRU(INV) 14.1 (Application) and 14.2 (Scope of consolidation) do not apply. BIPRU 8.2 (Scope and basic consolidation requirements for UK consolidation groups), BIPRU 8.3 (Scope and basic consolidation requirements for non-EEA sub-groups), BIPRU 8.4 (CAD Article 22 groups and investment firm consolidation waiver) and BIPRU 8.5 (Basis of consolidation) apply instead.

Capital floors: waiver from consolidation

2.34

G

If a firm has an investment firm consolidation waiver and it is applying the IRB approach, the waiver will explain how the investment firm consolidation waiver applies for the purpose of this section.