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 use of risk models
During the consultation process leading up to the legislation at CTA09/Part 2/Chapter 4, HMRC was asked if it would accept the use of banks’ internal risk models in order to calculate the capital required to support the trading book of a permanent establishment (PE). It was agreed that such risk models can be used to the extent that they are be acceptable to the Financial Services Authority (FSA) and are in fact used by the bank in calculating the capital required to support its trading book.
If an internal risk model is accepted by a home state regulator and there are no significant differences between the home regulatory requirements and those of the FSA, then that model can be used for the purposes of calculating the capital requirements for the PE’s trading book. Where there are significant differences between the two regimes, then adjustments should be made to take these into account and to reflect any specific requirements of the UK regulatory regime. Recognition requirements are covered in chapters TS and TV of the Interim Prudential Source Book for Banks (IPRU (BANK)).