INTM267747 - 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: Implementation of Basel II

Member countries of the Bank of International Settlements (BIS) implemented Basel II on various different dates. Canada, for example, applied it from November 2008 whereas the USA did not introduce it until 2010. Some non BIS members have implemented Basel II, others intend to implement it in the near future (Singapore, Malaysia, Thailand January 2008, India January 2009, Indonesia January 2010) while others do not. Countries therefore fall into one of three categories:

  • those already implementing Basel II;
  • those intending to implement Basel II; and
  • those which will not implement Basel II.

A second matter to be taken into consideration is that individual banks will apply Basel II in different ways. Large banks will apply more sophisticated and costly frameworks e.g. an Internal Rating Based (IRB) approach for credit risk, Value at Risk (VaR) for market risk and Advanced Measurement Approaches (AMA) for operational risk. Smaller banks will not incur the expense of sophisticated approaches and will veer towards standardised approaches.

It is possible that because different risk weighting frameworks are used, the risk weighting two banks would attach to similar assets may differ. For example, in less volatile times it is expected that more sophisticated approaches under Pillar 1 will result in less credit and market risk being attributed to assets because the risk can be more accurately identified than under Basel I and more standardised Basel II approaches. A reduction in the capital attributed to the branch may therefore occur and should be recognised if Steps 1 to 5 have been correctly applied using Basel II approaches.

The implications of the above are that the common methodology for risk weighting assets present under Basel I are present under Basel II. That being the case, a series of questions arises for tax purposes.