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: Use of Basel II approaches
Under Basel II and “Prudential sourcebook for Banks, Building Societies and Investment Firms” (BIPRU) guidelines, UK banks regulated by the Financial Services Authority (FSA) have a choice of approaches to risk weighting. Branches of non-resident banks operating in the UK should have a similar choice when calculating a capital attribution tax adjustment (CATA) for the purposes of CTA09/Part 2/Chapter 4. There are, however, some difficulties which may lead to the risk weighting methodologies being subject to enquiry.
The use of some particular approaches to risk weighting requires specific FSA consent, approval or permission. If the branch wishes to adopt an approach in this category for CATA purposes, it should be able to demonstrate that its home regulator has approved its use by the bank of which it is part. If that consent cannot be demonstrated then an approach which does not require specific regulatory approval must be used for CATA purposes.
INTM267769 indicates that the capital ratio of the bank overall may be a reasonable starting point for determining the capital ratio of the branch for CATA purposes. Where that ratio has been adopted, HMRC would expect the branch to use the same Basel approaches to calculating its capital adequacy requirements as the bank overall subject to the practice described in INTM267733 to INTM267737. Alternatively, HMRC would expect the branch to risk weight using the following approaches:
- Credit Risk: The Standardised Approach.
- Market Risk: as under Basel I unless the application of Basel II rules gives a significantly different result.
- Operational Risk: The Basic Indicator Approach or a Standardised Approach.
The rationale for this requirement is that the branch should not enjoy the benefit of adopting a capital ratio (more favourable for CATA purposes) which differs from that of a comparable UK bank while at the same time opting for a Basel methodology likely to result in a lower capital requirement than that of the enterprise of which it is a part.