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: Risk assessment of UK branches of foreign banks
Because of their relative size, UK banks are likely to use more sophisticated approaches than many small and medium sized overseas banks. This raises questions as to how we treat smaller overseas banks which operate under Basel II but with less sophisticated approaches. The following paragraphs provide guidance for UK branches of foreign banks in three categories:
- banks which have adopted Basel II
- banks which will adopt Basel II
- banks which will not adopt Basel II
Branches of banks which have adopted Basel II
Where the home country applies Basel II we can accept the computational approaches adopted by the bank overall unless:
- it appears that Basel II is not strictly applied by the home regulator; or
- following the end of the interim period, the ratio of Tier 1 capital to total assets is significantly out of line with the ratios shown by UK banks
The presence of either or both of these factors will be taken into account at the risk assessment stage.
For the purpose of clarity, where the bank is subject to a Basel II home regulatory regime we can accept the bank submitting a capital attribution tax adjustment (CATA) which calculates its capital adequacy requirement on the same basis as the bank as a whole risk calculates its capital adequacy requirement. Unless this approach gives a result significantly at variance from that arrived at by UK resident banks, we would not envisage opening an enquiry. This is basically the stance we now take under Basel I (INTM267712).
Exceptionally, for accounting periods ending in the year to 31 December 2009 banks which have a Basel II regulatory regime may, nevertheless, prepare a CATA in accordance with Basel I. Provided that the UK branch has not previously submitted a CATA calculated on a Basel II basis, this is acceptable and the risk assessment process should proceed as for earlier years.
Banks which will adopt Basel II
Where the bank is not yet subject to a Basel II home regulatory regime, but it is known it will be in future, we should offer the branch the choice of risk weighting its assets (for CATA purposes) under Basel I rules until the end of the interim period or until Basel II is adopted, whichever is the earlier. If it is to the advantage of the branch, it should be allowed to adopt standardised Basel II methodology for credit risk weighting and the basic indicator approach for operational risk weighting when computing its CATA.
Once the home regulator moves to Basel II, we would look to the methods of calculating its capital adequacy requirement adopted by the bank as a whole and would expect the branch to follow them. A divergence in approach between the branch and the bank as a whole under Basel I or later Basel II methodologies may warrant enquiry.
Banks which will not adopt Basel II
Where the bank will not be subject to a Basel II regulatory regime in the foreseeable future, the branch may opt to use Basel I or Basel II rules for the interim period. A divergence in approach between the branch and the bank as a whole under Basel I or later Basel II methodologies may warrant enquiry.