BIPRU TP 5 Pre CRD capital requirements applying on a solo basis during 2007: Building societies

1Application

5.1

R

This section applies to a building society that is applying BIPRU TP 3.4R (Use of IPRU on a solo basis during 2007).

Purpose of this chapter

5.2

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 building society this involves applying the credit risk requirements in IPRU(BSOC). This section explains how this is done. In particular this section explains what parts of IPRU(BSOC) apply during 2007 and what changes are made to IPRU(BSOC) for that purpose.

Duration of transitional

5.3

R

This section applies until 1 January 2008.

Drafting approach in this chapter

5.4

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 requirement for credit risk under IPRU and use the large exposures requirements in IPRU. This means that a building society should slot the credit risk requirements of IPRU(BSOC) into the general requirements of GENPRU and BIPRU.

5.5

G

The capital calculation for credit risk under BIPRU is made up of three elements, which are set out in GENPRU 2.1.51R (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 5.4G involves determining which of these three elements apply, and then finding their equivalents (if any) in IPRU(BSOC).

5.6

G

The general approach to calculating the capital requirements for credit risk in GENPRU and BIPRU is to calculate the overall credit risk capital requirement (which is the sum of the three components listed in BIPRU TP 5.5G) - a monetary amount - and to compare it with capital resources, also a monetary amount.

5.7

G

The general approach in IPRU(BSOC) is different. A building society calculates the total of its own funds (after making the relevant deductions) and the total of its risk weighted assets and off balance sheet items (in the latter case, after applying credit conversion factors). The own funds total is divided by the risk weighted assets total and the quotient expressed as a percentage: this is the pre-CRD solvency ratio.

5.8

G

To enable a building society to use BIPRU TP 3.4R (Pre CRD capital requirements applying on a solo basis during 2007), the calculation method set out in IPRU(BSOC), which is designed to produce the solvency ratio, needs adjustment so that it produces the credit risk capital component instead.

5.9

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 building society using BIPRU TP 3.4R (Pre CRD capital requirements applying on a solo basis during 2007) will calculate its capital resources under GENPRU 2.2, instead of calculating its own funds under IPRU(BSOC).

Rules in IPRU(BSOC) that apply in 2007

5.10

R

The rules in Chapter 7 of Volume 1 of IPRU(BSOC) (Large Exposures) apply during the period that BIPRU TP 3.4R applies. None of the other rules in IPRU(BSOC) apply except the rules in chapters 4 and 5 which apply to building societies generally whether or not they apply the treatment in this section.

Parts of Volume 1 of IPRU(BSOC) that apply in 2007

5.11

G

The parts of Volume 1 of IPRU(BSOC) that do and do not apply during the period that BIPRU TP 3.4R applies are set out in BIPRU TP 5.13G.

5.12

G

The table in BIPRU TP 5.13G assumes that the firm is not applying the IRB approach. BIPRU TP 5.36R to BIPRU TP 5.38R deal with a firm that does apply the IRB approach.

5.13

G

Table: Parts of Volume 1 of IPRU(BSOC) that apply in 2007

This table belongs to BIPRU TP 5.11G

Chapter X (Introduction)

Rule X.2.1 (Application)

N

BIPRU TP 5.1R applies in its place for the purposes of BIPRU TP 5. However see BIPRU TP 5.15G.

Definition of the BCD in X.7.1G

Y

Other definitions in X.7

Y

Apply to the extent used in the parts of IPRU(BSOC) that have effect under this section.

The rest of chapter X

N

Chapter 1 (Solvency)

Section 1.1 (Introduction)

N

Section 1.2 (Solvency rules)

N

Section 1.3 (Purpose of Capital)

N

Section 1.4 (EU Directives)

N

Section 1.5 (Threshold Ratios)

Y

See BIPRU TP 5.25G to BIPRU TP 5.26G

Section 1.6 (Own Funds)

N

Section 1.7 (Minority Interests)

N

Section 1.8 (Deductions)

N

Section 1.9 (Limits on Tier 2 capital)

N

Section 1.10 (Solvency Ratio)

Y

(1) Applies on a solo basis except to the extent BIPRU 2.1 (Solo consolidation) applies.

(2) Application on a consolidated basis is covered by BIPRU TP 10 (Pre CRD capital requirements applying on a consolidated basis during 2007).

(3) Requirement that the solvency ratio should be calculated on a consolidated basis where a building society has subsidiary undertakings does not otherwise apply.

(4) See BIPRU TP 5.20G to BIPRU TP 5.24G.

Section 1.11 (Solo consolidation)

N

Section 1.12 (Mortgage Subsidiaries)

N

Section 1.13 (Exclusions from consolidation)

N

Section 1.14 (Mortgage Indemnity Captives)

N

Section 1.15 (Securitisation)

Y

See BIPRU TP 5.33G to BIPRU TP 5.35G

Section 1.16 (Deductions of holdings)

N

Section 1.17 (capital cost and pricing)

N

Section 1.18 (CAD)

Y

Only applies to the extent that the relevant provisions of IPRU(BANK) apply to a building society under BIPRU TP 3.

See BIPRU TP 5.16R to BIPRU TP 5.19G.

Section 1.19 (Credit derivatives)

Y

Annex 1A (Calculation of Own Funds)

N

Annex 1B (Risk Asset Weights)

Y

See BIPRU TP 5.32G

Annex 1C (Off Balance Sheet Items)

Y

The treatment of items under section 1C.5 (The treatment of off-balance sheet items using the "mark to market" approach) applies to the types of item listed in section 1C.7 whether they are on or off balance sheet.

Annex 1D (Deductions from own funds)

N

Annex 1E (Verification of Interim Profits)

N

Annex 1F (Definition of Relevant Authority)

N

Annex 1G (Definition of Zones A and B)

Y

Annex 1H - Society Only Definitions

Y

Annex 1J - Threshold Appraisal Sheet

Y

Other chapters

Chapter 2 (Issued Capital)

N

Chapter 3 (Boards and Management)

N

Chapter 4 (Financial Risk Management)

Annex 4B (Credit derivatives)

Y

The provisions in BIPRU TP 4 (Pre CRD capital requirements applying on a solo basis during 2007: Banks) about Chapter CD of IPRU(BANK) (Credit derivatives) apply.

The rest of Chapter 4

Y

Subject to the other provisions of this section, applies in the same way as it does for a building society that does not use BIPRU TP 3.4R (Pre CRD capital requirements applying on a solo basis during 2007). See BIPRU TP 5.15G.

Chapter 5 (Liquidity) (including Annexes 5A to 5C )

Y

Subject to the other provisions of this section, applies in the same way as it does for a building society that does not use BIPRU TP 3.4R (Pre CRD capital requirements applying on a solo basis during 2007). See BIPRU TP 5.15G

Chapter 6 (Lending)

N

Chapter 7 (Large Exposures)

Y

(1) Applies on a solo basis except to the extent BIPRU 2.1 (Solo consolidation) applies.

(2) Application on a consolidated basis is covered by BIPRU TP 10 (Pre CRD capital requirements applying on a consolidated basis during 2007).

(3) Requirement that large exposures of a building society with subsidiary undertakings should, in general, be monitored on a fully consolidated basis does not otherwise apply.

(4) IPRU(BSOC) 7.7 (Systems) applies.

(5) See BIPRU TP 5.27R to BIPRU TP 5.30G.

Chapter 8 (Mortgage Indemnity Insurance)

N

Chapter 9 (Systems)

N

Chapter 10 (Securitisation)

Y

The provisions in BIPRU TP 4 (Pre CRD capital requirements applying on a solo basis during 2007: Banks) about Chapter SE of IPRU(BANK) (Securitisation) apply.

See BIPRU TP 5.33G to BIPRU TP 5.35G

Chapter 11 (Outsourcing)

N

Volume 2 of IPRU(BSOC)

5.14

G

Volume 2 of IPRU(BSOC) does not apply to a building society that applies BIPRU TP 3.4R (Use of IPRU on a solo basis during 2007). It has been replaced by the Building Societies Regulatory Guide, which applies to all building societies, not just ones that apply BIPRU TP 3.4R.

Chapters 4 and 5 of Volume 1 of IPRU(BSOC)

5.15

G

(1)

Chapters 4 and 5 of Volume 1 of IPRU(BSOC) apply to all building societies, not just ones that apply BIPRU TP 3.4R (Use of IPRU on a solo basis during 2007). The version that applies to a building society that applies BIPRU TP 3.4R is the one in force at the relevant time, not the version in force on 31 December 2006. However there are some exceptions to this, as explained in (2) and (3).

(2)

As BIPRU 2.3 (Interest rate risk in the non-trading book) does not apply to a firm applying BIPRU TP 3.4R, references in Chapter 4 to BIPRU 2.3 should be disregarded (see in particular paragraphs 4.1.3G, 4.7.1G and 4.7.7G of chapter 4 of Volume 1 of IPRU(BSOC)).

(3)

As shown in the table in BIPRU TP 5.12G, Annex 4B (Credit derivatives) applies to a building society that applies BIPRU TP 3.4R.

(4)

rule X.2.1 of Chapter X of Volume 1 of IPRU(BSOC) (Application) applies to all building societies, not just ones that apply BIPRU TP 3.4R. However BIPRU TP 5.1R is the relevant application rule for the purpose of BIPRU TP 5.

The trading book

5.16

R

BIPRU TP 4 (Pre CRD capital requirements applying on a solo basis during 2007: Banks) applies for the purpose of calculating the counterparty credit risk component and the market risk capital requirement.

5.17

G

The reason for BIPRU TP 5.16R is explained in BIPRU TP 5.18G to BIPRU TP 5.19G.

5.18

G

(1)

Only exceptionally will a building society have a trading book. If a building society does not have a trading book, the calculations that a building society should carry out under BIPRU TP 3 (Use of IPRU on a solo basis during 2007) and this section are simplified as described in this paragraph.

(2)

A building society does not have to calculate a counterparty risk capital component (the capital charge for counterparty risk in the trading book) or a concentration risk capital component (the capital charge for exceeding concentration risk limits in the trading book).

(3)

BIPRU 7 (Market risk) does not apply for the most part. This is because most of it only applies to the trading book.

(4)

BIPRU 7.5 (Foreign currency PRR) will apply if a building society has foreign currency exposure even if the building society does not have a trading book.

(5)

BIPRU 7.6 (Option PRR) will apply if a building society has foreign currency option positions.

(6)

BIPRU 7.4 (Commodity PRR) and BIPRU 7.6 (Option PRR) apply to a firm's commodity positions in its non-trading book as well as its trading book. However a building society will not generally have commodity positions.

5.19

G

Paragraph 1.18.1G of Volume 1 of IPRU(BSOC) (CAD) says that a building society on the "Trading" approach to financial risk management (described in chapter 4 of Volume 1 of IPRU(BSOC) (Financial Risk Management)), under which it can trade securities and maintain unhedged foreign exchange positions within defined limits, should calculate the capital requirements for its trading book and foreign exchange positions separately in accordance with IPRU(BANK). Therefore if a building society does have a trading book and applies BIPRU TP 3.4R (Use of IPRU on a solo basis during 2007):

(1)

it should calculate its credit risk charge for items in the trading book using IPRU(BANK) as adjusted under BIPRU TP 4 (Pre CRD capital requirements applying on a solo basis during 2007: Banks);

(2)

it should calculate its capital requirements for foreign currency positions under BIPRU 7 (Market risk), particularly BIPRU 7.5 (Foreign currency PRR) as adjusted under BIPRU TP 4;

(3)

it should calculate its capital requirements for other market risks under BIPRU 7 as adjusted under BIPRU TP 4; and

(4)

even if a building society does have a trading book it still does not have to calculate a concentration risk capital component as IPRU(BSOC) does not allow a building society to exceed the limits in Chapter 7 of IPRU(BSOC) (Large exposures).

How to calculate a credit risk capital component under IPRU

5.20

G

A building society should calculate its credit risk capital component (under paragraph 1.10 of Volume 1 of chapter 1 of IPRU(BSOC) (Solvency)) by taking the total of its risk weighted assets and off balance sheet items (using the risk weights in Annex 1B and the credit conversion factors in Annex 1C) and multiplying this by 8%.

5.21

G

BIPRU TP 5.18G to BIPRU TP 5.19G explain why the counterparty risk capital component and the concentration risk capital component (which together with the credit risk capital component make up the credit risk capital requirement) are unlikely to apply to a building society.

5.22

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 under BIPRU TP 5.20G should be in accordance with GENPRU 1.3.

5.23

G

In the light of BIPRU TP 5.9G , BIPRU TP 5.20G and BIPRU TP 5.22G, the first two sentences and the fourth sentence of paragraph 1.10 of Volume 1 of IPRU(BSOC) should be disregarded. The remainder of paragraph 1.10 gives useful detail on the credit risk calculations.

5.24

G

The solvency ratio provisions of IPRU(BSOC) are mostly guidance on rules 1.2.1 and 1.2.2 of Chapter 1 of Volume 1 of IPRU(BSOC). These rules do not apply in 2007. When the solvency ratio provisions of Volume 1 of IPRU(BSOC) 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 building society under this section.

How to maintain the threshold ratio

5.25

G

A building society should maintain the amount of capital resources (calculated under GENPRU 2.2 (Capital resources)) that corresponds to the result of multiplying the total of its risk weighted assets and off balance sheet items (as calculated for the purposes of BIPRU TP 5.20G) by its threshold ratio. Further transitional provisions about the threshold ratio can be found in GENPRU TP 9 (Individual capital guidance for BIPRU firms).

5.26

G

Complying with BIPRU TP 5.25G is treated as satisfying the expectation set out in section 1.5 of chapter 1 of Volume 1 of IPRU(BSOC) (Solvency) that a building society will maintain the threshold ratio. Maintaining the threshold ratio is in turn treated as satisfying the overall Pillar 2 rule so far as that rule requires a firm to maintain adequate capital resources.

Large exposures

5.27

G

Chapter 7 of Volume 1 of IPRU(BSOC) (Large exposures) applies in place of BIPRU 10 (Concentration risk).

5.28

G

BIPRU 10.5.2 R to BIPRU 10.5.3 R and BIPRU 10.5.5 R (Capital resources for concentration risk) apply for the purpose in BIPRU TP 5.27R. Although the table in BIPRU TP 3.8R (Parts of GENPRU and BIPRU that apply in 2007) says that BIPRU 10.5.14 R (Notification of trading book excesses) also applies, this is irrelevant to a building society as it relates to the regime for excess exposures in the trading book, which does not apply to a building society.

5.29

G

The effect of BIPRU TP 5.28R is that a building society should treat all references to own funds in chapter 7 of Volume 1 of IPRU(BSOC) (Large exposures) as references to capital resources under BIPRU 10.5.2 R to BIPRU 10.5.3 R and BIPRU 10.5.5 R (Capital resources for concentration risk). The last sentence of paragraph 7.3.1 of Volume 1 of IPRU(BSOC) should be disregarded.

5.30

G

Chapter 7 of IPRU(BSOC) is mostly guidance on rules 1.2.1 and 1.2.2 of Chapter 1 of Volume 1 of IPRU(BSOC). These rules do not apply in 2007. When the large exposures provisions of Volume 1 of IPRU(BSOC) are applied under this section they are guidance on the overall financial adequacy rule.

Operational risk

5.31

G

BIPRU TP 3.21R provides that the operational risk capital requirement is reduced where a firm uses BIPRU TP 3.4R (Capital floors for a firm using the IRB or AMA approaches). A building society (unless, exceptionally, it has a trading book) will apply BIPRU 3.4 to all its exposures. So the effect of BIPRU TP 3.21R in those cases will be to reduce the operational risk capital requirement to zero while BIPRU TP 3.4 applies.

Miscellaneous modifications of IPRU(BSOC)

5.32

G

When using Annex 1B of Chapter 1 of Volume 1 of IPRU(BSOC) (Risk Asset Weights) for the purposes of BIPRU TP 5.20G, the definition of "relevant authority" will be found in Annex 5A of Chapter 5 of Volume 1 of IPRU(BSOC) (Prudential Liquidity) instead.

5.33

G

BIPRU TP 5.12R says that chapter 10 of Volume 1 of IPRU(BSOC) (Securitisation) applies. Under that chapter a firm should deduct certain credit enhancements from capital. A building society 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).

5.34

G

Paragraph 6 of section 10.4 of Chapter SE of IPRU(BANK), which is applied to a building society by chapter 10 of Volume 1 of IPRU(BSOC) (Securitisation), says that if a firm does not meet the policy on liquidity facilities provided by sponsors or repackers it should fully consolidate the scheme. This does not apply under this section. Instead a building society should treat the scheme assets as being on its balance sheet.

5.35

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).

Firms using the IRB approach during 2007: General

5.36

R

BIPRU TP 5.37G to BIPRU TP 5.38R 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.

5.37

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 Section 1.10 of Volume 1 of IPRU(BSOC) (Solvency Ratio) does not 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.

5.38

R

A building society that has a trading book must apply the parts of BIPRU TP 4 (Pre CRD capital requirements applying on a solo basis during 2007: Banks) that deal with capital charges for items in the trading book for a bank that applies the IRB approach under BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007) as well as using IPRU.