The attribution of capital to foreign banking permanent establishments in the UK: The approach in determining an adjustment to funding costs - Step 4: Determining the loan capital: Overview
Loan capital in this context is the amount of interest-bearing capital within Tiers 1, 2 and 3 of a bank’s regulatory capital. Innovative Tier 1 capital is interest-bearing debt (see INTM267773) and so is included here. Preference shares, which are equity, are excluded.
The amount of attributable loan capital will clearly be dependent on the overall regulatory capital required, and reflect the fact that in practice the Tier 2 capital of UK banks is normally well below the maximum 50% of total regulatory capital permitted by the Financial Services Authority.
As an example, if a permanent establishment’s equity capital was determined under Step 3 (INTM267760 onwards) as 8% of its risk-weighted assets, then its loan capital may be in the region of 2 or 3%, depending on the facts and circumstances, rather than the maximum permitted 8%.