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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: The thin capitalisation principle

Thin capitalisation does remain a valid approach authorised by the OECD. No other approach to attributing capital to Permanent Establishments (PEs) goes any further towards addressing the issue of risk weighting raised by Basel II. They merely determine the amount and/or ratio of capital to be attributed to assets which have already been risk weighted. The OECD authorised Bank of International Settlements (BIS) approach, for example, simply allocates capital in the ratio of the bank’s overall capital to total risk weighted assets. It does not deal with the risk weighting process itself.