BIPRU TP 4 Pre CRD capital requirements applying on a solo basis during 2007: Banks

1Application

4.1

R

BIPRU TP 4 applies to a BIPRU firm that is:

(1)

a bank; and

(2)

applying BIPRU TP 3.4R (Pre CRD capital requirements applying on a solo basis during 2007).

Purpose of this section

4.2

G

BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007) says that during 2007 a firm may apply the credit risk requirements of IPRU instead of the ones in BIPRU. For a bank this involves applying the credit risk requirements in IPRU(BANK). This section explains how this is done. In particular BIPRU TP 4 explains:

(1)

which parts of IPRU(BANK) should be treated as credit risk requirements for this purpose;

(2)

what parts of IPRU(BANK) apply during 2007 and what changes are made to IPRU(BANK) for that purpose; and

(3)

what changes are made to GENPRU and BIPRU to reflect the fact that IPRU(BANK) applies in place of parts of GENPRU and BIPRU.

Duration of transitional

4.3

R

This section applies until 1 January 2008.

Drafting approach in this section

4.4

G

The purpose of BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007) is that the basic provisions of BIPRU and GENPRU should be in force from 1 January 2007. However a firm should be able to calculate the capital requirements for credit risk under IPRU and use the large exposures requirements in IPRU. This means that a bank should slot the credit risk requirements of IPRU(BANK) into the general requirements of GENPRU and BIPRU.

4.5

G

The capital calculation for credit risk under BIPRU is made up of three elements, which are set out in GENPRU 2.1.51 R (Calculation of the credit risk capital requirement). These are the credit risk capital component, the counterparty risk capital component and the concentration risk capital component. So the approach in BIPRU TP 4.4G involves finding equivalents for these three elements in IPRU(BANK).

4.6

G

BIPRU TP 3.8R (Parts of GENPRU and BIPRU that apply in 2007) provides that GENPRU 2.2 (Capital resources) applies during 2007. So a bank using BIPRU TP 3.4R (Pre CRD capital requirements applying on a solo basis during 2007) should calculate its capital resources under GENPRU 2.2, instead of calculating its capital under IPRU(BANK).

Parts of IPRU(BANK) that apply in 2007: Chapter GN

4.7

R

The parts of Chapter GN of IPRU(BANK) that do and do not apply during the period that BIPRU TP 3.4R applies are as set out in BIPRU TP 4.8R.

4.8

R

Table: Parts of Chapter GN of IPRU(BANK) that apply in 2007

This table belongs to BIPRU TP 4.7R

GN 3.3.19R to GN 3.3.20G (requirement to have adequate systems and controls for monitoring, controlling and calculating LE)

Y

GN 3.3.21R to GN 3.3.22G (requirement to notify FSA if breach or propose to breach the 25% limit)

Y

Solo consolidation is dealt with by BIPRU 2.1 (Solo consolidation)

GN 3.4.1R to GN 3.4.2G (requirement to have written policy statement for LE)

Y

GN 3.4.5R to GN 3.4.6G (requirement to have written provisioning policy statement)

Y

The reference to rule 3.3.17 is replaced by a reference to the requirements in GENPRU 1.3.4 R (General requirements: Accounting principles to be applied)

GN 3.4.9E to GN 3.4.12R (Policy statement procedures

Y

Applies in relation to large exposures and provisioning policy statements

GN 3.5.1R (Definitions)

Y

Applies for the purpose of the provisions that continue in force under this table

GN 3.6.1 R (Transitional rule for policy statements)

Y

Applies in relation to large exposures and provisioning policy statements

The parts of Chapter GN that remain in force even if the bank is not applying BIPRU TP 3.4R (Pre CRD capital requirements applying on a solo basis during 2007)

Y

See in particular rules 3.4.3 and 3.4.9 (Liquidity policy statement)

Rest of Chapter GN

N

A bank must calculate its capital for the purposes of the rules in this table about large exposures in accordance with BIPRU 10.5.2 R to BIPRU 10.5.5 R (Capital resources for concentration risk purposes).

Parts of IPRU(BANK) that apply in 2007

4.9

G

The parts of IPRU(BANK) that do and do not apply during the period that BIPRU TP 3.4R applies are as set out in BIPRU TP 4.11G. This section does not explain what parts of IPRU(BANK) do and do not apply to an overseas bank as this section only applies to a bank that is a BIPRU firm.

4.10

G

The table in BIPRU TP 4.11G assumes that the firm is not applying the IRB approach. BIPRU TP 4.40G to BIPRU TP 4.43G deal with a firm that does apply the IRB approach.

4.11

G

Table: Parts of IPRU(BANK) that apply in 2007

This table belongs to BIPRU TP 4.9G

GN (General)

See the table in BIPRU TP 4.8R

CO (Capital Adequacy Overview)

Sections 1-3

Y

Section 4

N

CB (Trading Book/Banking Book Division)

N

CA (Definition of Capital)

N

BC (Credit Risk in the Banking Book)

Y

BO (Proxies for Market Risk in Banking Book)

Y

FX (Foreign Exchange Risk)

N

CM (Commodities Risk)

N

DU (Common Treatments for Counterparty Risk)

Y

TI (Interest Rate Position Risk)

N

TE (Equity Position Risk)

N

TC (Counterparty Risk in the Trading Book)

Y

TL (Incremental Capital for Large Exposures)

Y

TU (Underwriting in Capital Adequacy Framework)

N

TS (CAD 1 Models)

N

TV (The Use of Internal Models)

N

LE (Large Exposures)

Y

CD (Credit Derivatives)

Y

(1) Applies for the purpose of credit risk (the calculation of the credit risk capital requirement)

(2) Applies for the purpose of large exposures to the extent set out in the chapter.

(3) Does not apply for the purpose position risk (calculation of the market risk capital requirement).

SE (Securitisation and Asset Transfers)

Y

See BIPRU TP 4.17G to BIPRU TP 4.19G

LM (Mismatch Liquidity)

Y

Subject to the other provisions of this section, applies in the same way as it does for a bank that does not use BIPRU TP 3.4R (Pre CRD capital requirements applying on a solo basis during 2007).

LS (Sterling Stock Liquidity)

Y

Subject to the other provisions of this section, applies in the same way as it does for a bank that does not use BIPRU TP 3.4R (Pre CRD capital requirements applying on a solo basis during 2007).

AR (Accounting and Other Records and Internal Control Systems)

N

ST (Foreign Exchange -Risk-Based Supervision)

N

FR (Fraud)

N

CL (Comfort letters)

N

VA (Valuation)

Section 4

Y

(1) Applies for the purpose of credit risk (the calculation of the credit risk capital requirement)

(2) Applies for the purpose of large exposures to the extent set out in the chapter.

Rest

N

NE (Collateral and Netting)

Y

(1) Applies for the purpose of credit risk (the calculation of the credit risk capital requirement)

(2) Applies for the purpose of large exposures to the extent set out in the chapter.

CS (Consolidated Supervision)

Paragraph 2b) of Section 3

Y

(1) Applies to the extent it provides for zero risk weighting for intra-group exposures on a solo basis.

(2) Applies for the purpose of the exemption for certain intra-group exposures for large exposure purposes on a solo basis (see paragraph 7 of section 9.2.2 of chapter LE of IPRU(BANK)).

(3) Otherwise does not apply.

Appendices C and D (equivalent third country prudential regimes

Y

Only has effect to extent that these apply on a solo basis for the purposes of the parts of IPRU(BANK) that apply under this table. In particular applies for the purposes of IPRU(BANK) BC Section 3 paragraph 6 (f) a) regarding equivalent CAD regimes.

Rest

N

OS (Outsourcing)

N

PN (Provisioning Policy Statement)

Y

General material about the parts of IPRU(BANK) that apply in 2007

4.12

G

Many of the chapters of IPRU(BANK) that apply under the table in BIPRU TP 4.11G (particularly the application sections) deal with the application of the material on a consolidated basis. However this does not apply for the purpose of this section as consolidation is dealt with under BIPRU TP 10 (Pre CRD capital requirements applying on a consolidated basis during 2007). Likewise those provisions also deal with solo consolidation but this material does not apply either as the provisions about solo consolidation in IPRU(BANK) do not apply for the purpose of this section. Nevertheless it is possible to combine the use of this section with solo consolidation under BIPRU 2.1 (Solo consolidation).

Status of material on credit risk charges

4.13

G

The credit risk provisions of IPRU(BANK) are mostly guidance on rule 3.3.13 of Chapter GN of IPRU(BANK). That rule does not apply in 2007. When the credit risk provisions of IPRU(BANK) are applied under this section they are guidance on the overall financial adequacy rule. In turn the overall financial adequacy rule is the rule on which the calculation of the capital requirements for credit risk under GENPRU and BIPRU is based for a bank under this section.

How to calculate credit risk charges

4.14

G

A bank should calculate the BIPRU credit risk charge for non-trading book items, called the credit risk capital component, by adding together the following:

(1)

the capital charge calculated under Chapter BC (taking into account the revised risk weights in Chapter BO);

(2)

the capital charge for OTC derivatives in the banking book under section 3 of Chapter DU;

(3)

the capital charge for free deliveries for banking book items in section 4 of Chapter DU; and

4.15

G

A bank should calculate the BIPRU credit risk charge for trading book items, called the counterparty risk capital component, by adding together the following:

(1)

the capital charge calculated under Chapter TU;

(2)

the capital charge for OTC derivatives in the trading book under section 3 of Chapter DU;

(3)

the capital charge for unsettled transactions and free deliveries for trading book items in section 4 of Chapter DU; and

(4)

the capital charge for unsettled transactions in the banking book calculated under Chapter TU (the calculation of the counterparty risk capital component includes a capital charge for unsettled transactions in the non-trading book as an exception to the principle that the counterparty risk capital component relates to the trading book).

4.16

G

BIPRU TP 4.28G deals with how to calculate the concentration risk capital component.

Adjustments to securitisation requirements

4.17

G

Under Chapter SE a bank should deduct certain credit enhancements from capital. A bank should deduct these credit enhancements at stage M of the calculation in the capital resources table (Deductions from the totals of tier one and two).

4.18

G

Paragraph 6 of section 10.4 of Chapter SE of IPRU(BANK) says that if a bank does not meet the policy on liquidity facilities provided by sponsors or repackagers it should fully consolidate the scheme. This does not apply under this section. Instead a bank should treat the scheme assets as being on its balance sheet.

4.19

G

The definition of investment grade for the purposes of Chapter SE (see in particular sections 3.2.2, 9.3 and 11.1) remains based on Chapter TI of IPRU(BANK).

Adjustments to counterparty credit risk: General

4.20

G

Broadly speaking the Directive transitional provisions that allow pre-2007 credit risk rules to be used in 2007 cover all credit risk rules. However the transitional provisions for trading book credit risk (Annex II of the Capital Adequacy Directive, which is implemented in BIPRU 14 (Capital requirements for settlement and counterparty risk)) is not quite as straightforward as that. In some cases pre-2007 requirements can be used. In others they cannot. One of the purposes of BIPRU TP 4.21G to BIPRU TP 4.25G is to reflect those cases in which the Directive requires the new requirements to apply from 1 January 2007.

Adjustments to counterparty credit risk: Free deliveries

4.21

G

A bank should include foreign currency and commodity transactions in the calculations under IPRU(BANK) Chapter DU section 4.2 (Free deliveries).

4.22

G

A bank should apply the capital treatment in the table in BIPRU 14.4.3 R and BIPRU 14.4.4 R (Capital treatment for free deliveries). But when the capital treatment in that table is that the firm must treat the transaction as an exposure, the bank should apply the treatment in IPRU(BANK) Chapter BC for non-trading book exposures or TC for trading book exposures rather than BIPRU 14 (Capital requirements for settlement and counterparty risk).

Adjustments to counterparty credit risk: Derivative transactions

4.23

G

A bank should treat a credit derivative in the trading book as a derivative to which section 3 of IPRU(BANK) Chapter TC (OTC derivatives) applies. However the capital treatment for credit derivatives as set out in BIPRU 14.2.5 R - BIPRU 14.2.8 R (Capital treatment for credit derivatives) does not apply; a bank should continue to use the treatment in IPRU(BANK) as adjusted by this section.

Adjustments to counterparty credit risk: Unsettled transactions

4.24

G

The alternative treatment set out in IPRU(BANK) DU 4.1.3 does not apply.

4.25

G

A bank should include foreign exchange and commodity transactions in the calculations under IPRU(BANK) Chapter DU section 4.1 (Unsettled transactions).

OTC derivatives

4.26

G

The treatment in section 3 of Chapter DU applies to the derivatives mentioned there whether or not they are off-balance sheet.

How to use the IPRU(BANK) large exposure rules

4.27

G

IPRU(BANK) Chapter LE (Large exposures) applies in place of BIPRU 10 (Concentration risk).

4.28

G

A bank should calculate the concentration risk capital component as being equal to the capital charge under IPRU(BANK) Chapter TL.

4.29

G

BIPRU 10.5.2 R to BIPRU 10.5.5 R (Capital resources for concentration risk purposes) apply in place of the corresponding provisions of IPRU(BANK). The provisions in IPRU(BANK) about the calculation of the large exposures capital base (LECB) do not apply.

4.30

G

Generally a bank should use the specific risk weights that apply under BIPRU 7 (Market risk) for the purposes of the incremental capital calculation under section 2.2 of Chapter TL and the net trading book position under paragraph 2(b) of section 7 of Chapter LE. However BIPRU TP 4.33G also applies for these purposes.

4.31

G

References in paragraph 4(d) of section 9.2.1 and paragraph 7 of section 9.2.2 of Chapter LE to the requirements in Chapter CS about zero-risk weighting intra-group exposures still apply.

4.32

G

When Chapter LE of IPRU(BANK) is applied under this section it is guidance on the overall financial adequacy rule as well as on the relevant provisions of Chapter GN of IPRU(BANK).

Interest rate PRR

4.33

G

A bank should use IPRU(BANK) as it applies under BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007) and BIPRU TP 4 to calculate the specific risk portion of the interest rate PRR under BIPRU 7.2 (Interest rate PRR) to the extent that the relevant rules in BIPRU 7.2 require the use of the standardised approach to credit risk.

4.34

G

The reason for BIPRU TP 4.33G is that the calculation of the specific risk portion of the interest rate PRR under BIPRU 7 (Market risk) involves the use of the standardised approach to credit risk. The specific risk rules therefore need to be adjusted for a firm that is not using the standardised approach to credit risk in 2007 so as to apply the pre-2007 method of calculating specific risk.

Valuation

4.35

G

BIPRU TP 3.8R (Parts of GENPRU and BIPRU that apply in 2007) says that GENPRU 1.3 (Valuation) applies during 2007, so the values of assets and off balance sheet items used in the calculation of credit risk charges should be in accordance with GENPRU 1.3.

Definitions

4.36

G

Any reference to a qualifying debt security in a part of BIPRU that applies during 2007 should be interpreted in accordance with IPRU(BANK). However BIPRU 7.2.50 R (Must not apply qualifying debt security treatment to risky assets) also applies.

4.37

G

The reason for BIPRU TP 4.36G is that the BIPRU definitions rely in part on the standardised approach to credit risk. The definitions therefore need to be adjusted for a bank that is not using the standardised approach to credit risk in 2007.

Mapping GENPRU and BIPRU concepts onto IPRU

4.38

G

Some of the parts of IPRU(BANK) that apply in 2007 refer to parts of IPRU that do not apply. BIPRU TP 3.10R explains that where this happens a firm should interpret that cross-reference in accordance with the provision in BIPRU or GENPRU that corresponds to the IPRU provision that does not apply in 2007. A firm should refer to IPRU in the case of cross-references in GENPRU and BIPRU to provisions in GENPRU and BIPRU that do not apply in 2007. BIPRU TP 4.39G sets out how certain concepts in IPRU(BANK) correspond to ones in GENPRU and BIPRU. The purpose of the table is to help firms to interpret such cross-references.

4.39

G

Table: Mapping GENPRU and BIPRU concepts onto ones in IPRU(BANK)

This table belongs to BIPRU TP 4.38G

BIPRU 1.2

Chapter CB

GENPRU 2.2

Chapter CA

BIPRU 7.2

Chapter TI

BIPRU 7.3

Chapter TE

BIPRU 7.8

Chapter TU

BIPRU 7.4

Chapter CM

BIPRU 7.5

Chapter FX

BIPRU 7.10

Chapter TV

BIPRU 8

Chapter CS

GENPRU 1.3

Chapter VA

Market risk capital component (excluding charges arising from FX and commodity banking book business) and the counterparty risk capital component, excluding unsettled transactions arising from the banking book.

Trading book capital requirements

Non-trading book

Banking book

Trading book

Trading book

Capital resources calculated under BIPRU 10.5.2 R to BIPRU 10.5.5 R

Large exposures capital base (LECB)

Concentration risk capital component or the capital resources used to meet it

Incremental capital under Chapter TL

Financial derivative instruments and trading book credit derivatives

OTC derivatives

the overall financial adequacy rule

Rule GN 3.3.13R (Adequate capital)

individual capital guidance

individual capital ratio

Bank that calculates its capital requirements under BIPRU 1.2.17R (Firm with small trading book using non-trading book treatments for certain trading book items)

Bank to which the Capital Adequacy Directive does not apply

trading book concentration risk excess

Exposures over the 25% in the trading book under Chapter TL

Firms using the IRB approach during 2007: General

4.40

G

BIPRU TP 4.41G to BIPRU TP 4.43G only apply to a firm that is applying the IRB approach under BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007) as well as using IPRU.

4.41

G

The effect of BIPRU TP 3.17G (Pre CRD capital requirements applying on a solo basis during 2007 for firms also using the IRB approach) is that neither credit risk or counterparty risk requirements of IPRU(BANK) apply to an exposure to which the firm applies the IRB approach. The IRB approach requirements in BIPRU apply instead. The main requirements are listed in BIPRU TP 3.17G.

4.42

G

A firm should apply BIPRU 7.2.45 R - BIPRU 7.2.47 R (Using internal ratings to calculate specific risk and treatment of securitisations) to calculate the specific risk portion of the interest rate PRR to the extent that the obligor or exposure in question comes within the scope of its IRB permission.

4.43

G

The definition2of qualifying debt security in the Glossary applies2 if the security or obligor in question comes within the scope of a firm's IRB permission.