BIPRU TP 3 Pre CRD capital requirements applying on a solo basis during 2007

1Application

3.1

R

This section applies to a BIPRU firm.

Purpose

3.2

G

This section (together with BIPRU TP 4 - BIPRU TP 10) implements Articles 152(8) - (14) of the Banking Consolidation Directive and Article 50(1) of the Capital Adequacy Directive.

Duration of transitional

3.3

R

This section applies until 1 January 2008.

Continued use of IPRU

3.4

R

Unless a firm notifies the FSA to the contrary, a firm must use on a solo basis the credit risk rules in whichever part of IPRU applies to it under BIPRU TP 1 rather than the ones in BIPRU.

3.5

R

BIPRU TP 3 sets out, for all types of firm, which parts of GENPRU and BIPRU do and do not apply when BIPRU TP 3 applies.

3.6

G

BIPRU TP 4 - BIPRU TP 9 set out, for each category of BIPRU firm, which sections of the part of IPRU that applies to it do and do not apply during 2007 as follows:

(1)

BIPRU TP 4 applies to a bank;

(2)

BIPRU TP 5 applies to a building society;

(3)

BIPRU TP 6 applies to an investment management firm;

(4)

BIPRU TP 7 applies to a UCITS investment firm;

(5)

BIPRU TP 8 applies to a securities and futures firm; and

(6)

BIPRU TP 9 applies to a personal investment firm.

3.7

G

BIPRU TP 10 explains how this section is applied on a consolidated basis.

Disapplication of GENPRU and BIPRU

3.8

R

Table: Parts of GENPRU and BIPRU that apply in 2007

This table belongs to BIPRU TP 3.5R

GENPRU TP (Transitional provisions)

Y

GENPRU 1.1 (Application and scope)

Y

GENPRU 1.2 (Adequacy of financial resources)

The overall financial adequacy rule

Y

GENPRU 1.2 so far as it applies to liquidity risk

Y

The rest of GENPRU 1.2 for purposes other than liquidity risk

N

GENPRU 1.3 (Valuation)

Y

GENPRU 1.4 (Actions for damages)

Y

GENPRU 1.5 (Application of GENPRU 1 to Lloyd's)

Not applicable as does not apply to BIPRU firms

GENPRU 2.1 (Calculation of capital resources requirements)

Y

GENPRU 2.2 (Capital resources)

Y

GENPRU 2.3 (Application of GENPRU 2 to Lloyd's)

Not applicable as does not apply to BIPRU firms

GENPRU 3.1 (Cross sector groups)

Y

GENPRU 3.2 (Third-country groups)

Y

BIPRU TP (Transitional provisions)

Y

BIPRU 1.1 (Application and scope)

Y

BIPRU 1.2 (Definition of the trading book)

Y

BIPRU 1.3 (Application for advanced approaches)

Y

BIPRU 1.4 (Actions for damages)

Y

BIPRU 2.1 (Solo consolidation)

Y

BIPRU 2.2 (Adequacy of financial resources)

N

BIPRU 2.3 (Interest rate risk in the non-trading book);

N

BIPRU 3 (Standardised approach to credit risk)

N

BIPRU 4 (The IRB approach)

N

BIPRU 5 (Credit risk mitigation)

N

BIPRU 6 (Operational risk)

N

BIPRU 7(Market risk)

BIPRU 7.2.43 R to BIPRU 7.2.49 R (Interest rate specific risk calculation)

N (BIPRU TP 4 - BIPRU TP 9 set out what applies in place of these rules)

BIPRU 7.11.18 R to BIPRU 7.11.58 R (Special treatment of credit default swaps)

N

Rest of BIPRU 7

Y

BIPRU 8 (Group risk - consolidation)

Y

BIPRU 9 (Securitisation)

N

BIPRU 10 (Concentration risk)

BIPRU 10.5.2 R to BIPRU 10.5.5 R (Capital resources)

Y

BIPRU 10.5.14 R (Notification of trading book excesses)

Y Only applies if BIPRU TP 4 to BIPRU TP 10 allow excess exposures in the trading book.

The rest of BIPRU 10

N

(Disclosure) BIPRU 11

N

BIPRU 12

Chapter does not yet exist

BIPRU 13 (Financial derivatives, SFTs and long settlement transactions)

N

BIPRU 14 (Capital requirements for settlement and counterparty risk)

N

This table is subject to the adjustments set out in BIPRU TP 3.15R to BIPRU TP 3.21R when a firm also uses the IRB approach.

Application of BIPRU concentration risk rules for underwriting

3.9

G

Even though BIPRU 10 (Concentration risk) does not apply, the provisions in BIPRU 7.8 (Securities underwriting) about the calculation of the net underwriting exposures still apply.

How to interpret cross-references

3.10

R

If a provision in BIPRU or GENPRU that applies under this section refers to a provision of BIPRU or GENPRU that does not apply that reference must be read as referring to the IPRU provision that applies instead under this section (if any). If a provision in IPRU that applies under this section refers to a provision of IPRU that does not apply that reference must be read as referring to the corresponding provision in BIPRU or GENPRU that applies under this section.

3.11

G

BIPRU TP 4 - BIPRU TP 9 set out, for each category of BIPRU firm, some of the main examples of the sort of cross-references referred to in BIPRU TP 3.10R.

3.12

G

GENPRU 2.2.187 R and GENPRU 2.2.188 R (Upper tier two capital: General/collective provisions) still applies to a firm that uses BIPRU TP 3.4R. The reference to the sum of risk weighted assets under the standardised approach for credit risk should be read as being to the sum of risk-weighted assets under the provisions of IPRU that apply under this section.

Combination of IPRU with the standardised approach to credit risk

3.13

R

A firm may not combine the standardised approach to credit risk with the use of IPRU under BIPRU TP 3.4R.

Effect of switching off GENPRU 1.2

3.14

G

If GENPRU 1.2 (Adequacy of financial resources) does not apply to a firm, stress and scenario testing obligations in other parts of the Handbook still apply. In particular these include stress and scenario tests required under the IRB approach (see in particular BIPRU 4.3.39 R to BIPRU 4.3.42 G (Stress tests used in assessment of capital adequacy) and BIPRU 2.2.41 R to BIPRU 2.2.45 G), under the VaR model approach and under BIPRU 10.6.22 R to BIPRU 10.6.27 G (Stress testing of credit risk concentrations).

Continued use of IPRU combined with the IRB approach

3.15

R

BIPRU TP 3.16R to BIPRU TP 3.21R only apply to a firm that is applying the IRB approach as well as using IPRU.

3.16

R

If a firm's IRB permission allows it to do this, a firm may combine the IRB approach with the use of IPRU under BIPRU TP 3.4R.

3.17

G

If an exposure comes within the scope of a firm's IRB permission the firm should use the IRB approach to calculate the credit risk capital component and the counterparty risk capital component with respect to that exposure in accordance with BIPRU rather than IPRU. In particular BIPRU 4 (The IRB approach), BIPRU 5 (Credit risk mitigation), BIPRU 9 (Securitisation), BIPRU 13 (Financial derivatives, SFTs and long settlement transactions) and BIPRU 14 (Capital requirements for settlement and counterparty risk) apply.

3.18

R

If a firm combines the IRB approach with the use of IPRU under BIPRU TP 3.14R, the disapplication of BIPRU 10 (Concentration risk) still applies. However in the case of exposures to which the firm applies the IRB approach:

(1)

BIPRU 10.6.14 R to BIPRU 10.6.26 R (Exemptions for firms using the financial collateral comprehensive method2, Exemptions for firms using own estimates of LGDs and conversion factors under the IRB approach and Stress testing of credit risk concentrations) apply;

(2)

a firm may not recognise credit risk mitigation if it does not comply with BIPRU 5 and BIPRU 4.10 (Credit risk mitigation) to the extent they apply to BIPRU 10; and

(3)

BIPRU 5 and BIPRU 4.10 apply for the purpose of calculating the amount of credit risk mitigation to the extent that they apply to BIPRU 10.

3.19

R

BIPRU 11 (Disclosure) applies to exposures to which the firm applies the IRB approach. The rest of BIPRU 11 also applies except to the extent that it relates to parts of BIPRU and GENPRU that do not apply under this section.

3.20

R

BIPRU 7.11.18 R to BIPRU 7.11.58 R (Special treatment of credit default swaps) apply to exposures subject to the IRB approach.

Reduced operational risk capital requirement

3.21

R

Where BIPRU TP 3.4R applies, the operational risk capital requirement is reduced by the percentage representing the ratio of the value of the firm's exposures for which capital requirements are calculated in accordance with BIPRU TP 3.4R to the total value of its exposures.