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HMRC internal manual

International Manual

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 - Simplified standardised approach to credit risk

The Financial Services Authority (FSA) may allow a limited license firm (BIPRU 1.1.11) or limited activity firm (BIPRU 1.12) that has only incidental credit exposures to use a simplified standardised approach to calculating risk weights. This permission is therefore unlikely to apply to banks and this approach is only relevant to an exposure class for which risk weights are determined by the rating of a nominated ECAI or an export credit agency. For other exposure classes the normal standardised approach applies.

Under the simplified standardised approach exposures are allocated to sixteen exposure classes which are broken down into exposure sub-classes (see BIPRU 3.5.5). The sub-classes are not split into separate credit quality ratings but are assigned one rating each by the FSA. For example, exposure to a central government is sub-divided into seven sub-classes according to the location of the central government institution and the currency involved. Of the seven sub-classes six have a zero risk weighting and one a 100% risk rating.

The FSA also prescribes a standard risk weighting for off balance sheet items depending on which of four risk categories the item falls into:

  • full risk
  • medium risk
  • medium/low risk
  • low risk

Each category has a risk weighting assigned to it: 100%, 50%, 20%, 0% respectively. For details of the items included under each category of risk see BIPRU 3.7.2.