Foreign banks trading in the UK through permanent establishments: The approach in determining an adjustment to funding costs - STEP 2: Risk weighting the assets - the Basel II regulatory regime: Pillar 1 - the standardised approach to credit risk
Full details of the TSA are contained at “Prudential sourcebook for Banks, Building Societies and Investment Firms” (BIPRU) 3.
Financial Services Authority (FSA) requirements in calculating risk weighting intra-group exposures are found at BIPRU 3.2.25. Such exposures require risk weighting unless they fulfil the conditions prescribed at BIPRU 3.2.25. An exception is made where the bank’s exposure is to a parent, subsidiary, subsidiary of the parent or is linked by a consolidation relationship. That exception should therefore also apply to UK branches of overseas banks in the same way it applies to a UK bank. However, certain conditions must be met for zero rating to apply. One of the conditions to be met before the FSA will permit zero rating is that the counterparty is established in the UK and either is incorporated in the UK or the main centre of its interests is situated within the UK (BIPRU 2.2.25 (d)). Where it is claimed that zero rating is due, the claim should be examined closely and, if appropriate, sight of any FSA agreement of the zero rating should be obtained. The practice described at INTM267725 however will continue to apply in respect of bona fide treasury companies.
Internal hedges are recognised and may be included in the trading book (see INTM267719) if the conditions specified in BIPRU 1.2.13 to 1.2.20 apply.
Under TSA the bank is required to allocate its assets into one of sixteen different categories (see BIPRU 3.2):
|1||claims or contingent claims on central governments or central banks|
|2||claims or contingent claims on regional governments or local authorities|
|3||claims or contingent claims on administrative bodies and non-commercial undertakings|
|4||claims or contingent claims on multilateral development banks|
|5||claims or contingent claims on international organisation|
|6||claims or contingent claims on institutions|
|7||claims or contingent claims on corporates|
|8||retail claims or contingent retail claims|
|9||claims or contingent claims secured on real estate property|
|10||past due items|
|11||items belonging to regulatory high-risk categories|
|12||claims in the form of covered bonds|
|14||short-term claims on institutions and corporates|
|15||claims in the form of CIU’s|