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HMRC internal manual

International Manual

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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: off-balance sheet items

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).

When looking at off balance sheet items, a distinction is made between over the counter (OTC) derivative contracts and other off balance sheet items.

The off-balance sheet credit risk in the case of non-OTC items is measured by multiplying the notional principal amount by a credit conversion factor (CCF) of 0%, 20%, 50% or 100% and weighting the resultant figure by the counter party risk weight.

The same counter party risk weight is used as for on balance sheet assets.

The following, non-exhaustive, list provides some details of the different CCFs:

100% credit conversion factor

This applies to items such as:

  • direct credit substitutes, including general guarantees of indebtedness and standby letters of credit; sales and repurchase agreements,
  • asset sales with recourse where the credit risk remains with the bank,
  • forward asset purchases,
  • forward deposits placed,
  • the unpaid part of partly paid shares and securities.

50% credit conversion factor

This applies to items such as:

  • transaction related contingent items not having the character of direct credit substitutes i.e. warranties and standby letters of credit related to particular transactions,
  • note issuance and revolving underwriting facilities,
  • other commitments (i.e. formal standby facilities and credit lines) with an original maturity of over 1 year.

20% credit conversion factor

This applies to items such as documentary credits collateralised by the underlying shipments.

0% credit conversion factor

This includes items such as other commitments - for example formal standby facilities and credit lines - with an original maturity of up to a year or which can be unconditionally cancelled at any time.

Two examples of how the calculation might look are as follows:

Example 1

A bank extends a 5-year revolving credit facility to a company of £500,000.

The calculation would be £500,000 x 50% (CCF) x 100% (counter party credit risk weighting) which results in a risk-weighted amount of £250,000.

Example 2

A bank provides a guarantee in respect of a debt of £100,000 owed by a company.

The risk-weighted amount would be £100,000 x 100% (CCF) x 100% (counter party credit risk weighting), which results in a risk-weighted amount of £100,000.