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HMRC internal manual

International Manual

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Foreign banks trading in the UK through permanent establishments: The approach in determining an adjustment to funding costs - STEP 2: Risk weighting the assets - Basel II regulatory regime: Step II under Basel II

Step 2 (INTM267711 to INTM267725) explains the HMRC approach to the risk weighting of assets under the first Basel Accord (Basel I) as applied by the Financial Services Authority (FSA).

This section explains the HMRC approach to how the FSA provides for the calculation of capital requirements in accordance with the Capital Requirements Directives 2006/48/EC and 2006/49/EC. Those directives implement the Bank of International Settlements (BIS) publication 107 of June 2004 “International Conversion of Capital Measurement and Capital Standards: a Revised Framework” as amended. This is known as Basel II. Full details of the FSA requirements for banks under Basel II and the directives are found in the FSA “Prudential sourcebook for Banks, Building Societies and Investment Firms” (BIPRU) available at the FSA website . 

This section contains a broad overview of the FSA requirements but is not intended to reproduce them in detail. Where necessary, the relevant BIPRU references are provided.

The main purpose of this section is to provide the banks with some certainty as to the HMRC approach to the attribution of profits to Permanent Establishment’s in the period immediately following adoption of the directives by the UK.