Chargeable equity and liabilities: definition of high quality liquid assets and denial of double relief
For chargeable periods ending on or before 30 September 2016
For the purposes of the bank levy, ‘high quality liquid assets’ means assets which would be within Section BIPRU 12.7.2(1) to (4) of the FCA Handbook (web).
In particular, the scope of what can be included as a high quality liquid asset is set out by the FSA definition at BIPRU 12.7.2R5 and these are essentially:
- high quality debt securities issued by a government or central bank
- securities issued by a designated multilateral development bank
- reserves in the form of sight deposits with a central bank of the kind specified in BIPRU 12.7.5R and BIPRU 12.7.6R, and
- in the case of a simplified ILAS BIPRU firm* only, investments in a designated money market fund.
- This is subject to any direction made by the FSA in relation to the entity that holds the assets or the relevant group of which they are a member under section 148 of FISMA 2000 to modify the rules around what qualifies as a high quality liquid asset for the entity. Such a direction may, in respect of a particular entity or group, remove certain assets from the list and add certain other assets.
For chargeable periods ending on or after 1 October 2016
For the purposes of the bank levy, ‘high quality liquid assets’ means assets which would be treated as Level 1 liquid assets by the Prudential Regulation Authority (PRA).
From 1 October 2015 the PRA has adopted new European standards to determine the requirements for a bank’s liquid asset buffer and the type of assets which may be included within them.
A bank may only claim an high quality liquid assets deduction for the holding of assets that would meet the Level 1 criteria of the PRA. In the case of an entity operating in the UK through a permanent establishment this may mean that a calculation needs to be undertaken for bank levy purposes.
Details on what aspects of their regulatory reports a bank who operates in the UK through a permenant establishment may be able to use can be found in 362000 Application for non-EEA banks.
The scope of what assets can be included as high quality liquid assets is set out by the Article 10(1) of Commission Regulation 2015/61.
This regulation outlines 3 categories of liquid assets, however for the purposes of the bank levy only the highest quality of asset designated Level 1 will qualify for the deduction.
These are essentially:
(a) coins and banknotes;
(b) the following exposures to central banks:
i. assets representing claims on or guaranteed by the European Central Bank (ECB) or a Member State’s central bank;
ii. assets representing claims on or central banks where the central bank or the central government are assigned a zero risk weighting;
iii. reserves held in a central bank referred to in points (i) and (ii) provided the reserves may be withdrawn at any time during stress periods;
(c) assets representing claims on or guaranteed by the following central or regional governments, local authorities or public sector entities:
i. the central government of a Member State;
ii. the central government of a country assigned a zero risk credit weighting;
iii. regional governments or local authorities in a Member State, provided that they are treated as exposures to the central government;
iv. regional governments or local authorities in a country of the type referred to in point (ii), provided that they are treated as exposures to the central government;
v. public sector entities provided that they are treated as exposures to the central government of a Member State or to one of the regional governments or local authorities referred to in point (iii);
(d) assets representing claims on or guaranteed by the central government or the central bank of a country which is not assigned a zero risk credit weighting, subject to the following limits;
i. up to the amount to cover stressed net liquidity outflows incurred in the same currency in which the asset is denominated, or
ii. where the asset is not denominated in the domestic currency, up to the amount of stressed net liquidity outflows in that foreign currency corresponding to its operations in the jurisdiction where the liquidity risk is being taken.
(e) assets issued by certain credit institutions which are treated as an exposure to the central government of the Member State and comply with the designated regulatory requirements:
(f) exposures in the form of extremely high quality covered bonds, which comply with the designated regulatory requirements (subject to haircut):
(g) assets representing claims on or guaranteed by the multilateral development banks and international organisations.
The amount of the deduction permitted for the holding of any extremely high quality covered bonds (e) will be restricted by a haircut of at least 7%, or higher if directed by the regulator.
To qualify as zero risk weighted any government, entity or agency must be assigned a credit assessment of at least credit quality step 1 by a nominated external credit assessment institution (ECAI) in accordance with Article 114(2) of Regulation (EU) No 575/2013.
For all chargeable periods
In applying the definition, it is the balance sheet figure of high quality liquid assets held at the end of the chargeable period which is relevant.
Where the asset recognised on the balance sheet is not the high quality liquid asset itself (for example where the high quality liquid asset has been acquired under a reverse repo), the value which may be deducted is restricted to lower of the balance sheet value of the corresponding asset (for example the repo debtor) and the fair value of the underlying collateral (provided it would be a high quality liquid asset for the purposes of the bank levy were it on the balance sheet).
Denial of double relief
A deduction cannot take place under this section if the lending asset has already been deducted from chargeable liabilities under the netting provisions (See BKLM350000).