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International Manual

HM Revenue & Customs
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The attribution of capital to foreign banking permanent establishments in the UK: The approach in determining an adjustment to funding costs - STEP 2: Risk weighting the assets: the banking book: on-balance sheet items

Risk weighting framework (banking book): on balance sheet items - chapter BC - IPRU (BANK)

Precise details of the Financial Services Authority (FSA) regulatory regime can be found via the FSA website and the rules on the risk weighting of assets are in the Interim Prudential Source Book for banks (IPRU (BANK).

Counter parties to loans are given risk weightings that reflect their relative riskiness. Unless an exposure merits a reduced risk weighting under the weighting bands it should receive a 100% risk weighting.

Instances where there are variations from the normal weighting and full details of risks involved in lending to various countries are set out in IPRU (Bank). Countries included in the term Zone A include full members of the Organisation for Economic Co-operation and Development. At the time of writing the Zone A countries comprise Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, South Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Saudi Arabia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, UK and USA.

Zone B comprises all countries not within Zone A.

The risk weighting bands are as follows:

0% risk weighting

This applies to a number of asset types including:

  • certain cash and claims collateralised by cash deposits placed with the lending institution,
  • certain claims on Zone A central governments or central banks,
  • claims carrying the explicit guarantees of such Zone A central governments or banks,
  • certain claims or claims guaranteed by Zone B central governments and central banks where these are denominated in local currency and funded by liabilities in the same currency,
  • certificates of tax deposit.

10% risk weighting

These comprise certain holdings of government securities, in this instance as a proxy for market risk rather than as a measurement of credit risk.

20% weighting

This applies to a number of asset types including:

  • claims on, or guaranteed by, certain listed multilateral development banks,
  • claims on, or guaranteed by, credit institutions in Zone A countries,
  • claims on or guaranteed by credit institutions in Zone B countries where the claim has a residual maturity of 1 year or less,
  • claims on or guaranteed by Zone A public sector entities (for instance in the UK these comprise local authorities and certain other non-commercial public bodies),
  • certain claims on investment firms, exchanges and clearing houses.

Some government securities, again as a proxy for market risk.

50% weighting

Asset types coming under this category include:

  • loans to individuals fully and completely secured by a first charge on a residential property,
  • loans to certain housing associations,
  • certain mortgage sub-participations and mortgage-backed securities issued by certain SPVs,
  • loans to public universities fully secured by a mortgage on residential property.

100% weighting

This applies to a number of asset types including:

  • claims on the non bank private sector,
  • claims on banks in Zone B countries with a residual maturity of over 1 year,
  • claims on, or guaranteed by, Zone B central governments and banks (unless denominated in the national currency and funded by liabilities in the same currency),
  • claims on zone B regional governments or local authorities,
  • claims on Zone B public sector entities,
  • claims on commercial entities owned by the public sector,
  • premises, plant equipment, other fixed assets, real estate, trade investments and other assets not otherwise specified.