BKLM393000 - Loss absorbing instruments issued by overseas subsidiaries: Amount of reduction

The reduction is made at FA11/SCH19/PARA15N(1) Step 3. This means that it falls before the reduction made in respect of high quality liquid assets (para 15N(1) Step 4) but after all other exclusions and adjustments made in calculating the Bank Levy (para 15N(1) Steps 1-2).

The amount of the reduction is calculated as follows:

1. Identify UK assets that are loss absorbing instruments

The group identifies assets held by a UK member of the relevant group that are or represent “qualifying” loss absorbing instruments issued by overseas subsidiaries (para 15W(3), BKLM392000 Loss absorbing instruments issued by overseas subsidiaries: loss absorbing instruments).

“Qualifying” loss absorbing instruments issued by overseas subsidiaries must either themselves be held by a UK entity or an asset representing the instrument must be held by a UK entity. The first part of the calculation should therefore be a straightforward matter of identifying the “qualifying” instruments (or assets representing those instruments) on the balance sheet(s) of UK member(s) of the relevant group.

A UK member of the relevant group may be (para 15W(6)):

  • The chargeable UK sub-group or entity (para 15M),
  • Another UK sub-group of the relevant group (para 15B), or
  • A chargeable UK resident entity which is a member of the relevant group (para 15M).
2. Stream assets to separate out Tier one instruments

The assets identified at 1. are divided into:

  • Para 15X(1)(a) assets, which are or represent qualifying loss absorbing instruments that are Tier one capital equity and liabilities, as defined for at para 30 but taking into account SI2020/1188/REG3 (BKLM392000 Loss absorbing instruments issued by overseas subsidiaries: loss absorbing instruments), and
  • Para 15X(1)(b) assets, which are or represent other qualifying loss absorbing instruments.
3. Cap amount of reduction: Tier one instruments

Para 15X(1)(a) assets are streamed and any available reduction is capped against Tier one equity and liabilities that are not excluded by para 30, and that remain within the chargeable UK sub-group or entity’s equity and liabilities after para 15N(1) Steps 1-2 (para 15X(3), para 15W(7)). Tier one instruments not excluded by para 30 may include sums that would have been Tier one capital equity and liabilities but for deductions made for significant investments in loss absorbing instruments issued by non-UK resident subsidiaries under Article 36(1)(i) or Article 56(d) Capital Requirements Regulation (CRR) (SI2020/1188/REG3).

4. Cap amount of reduction: other loss absorbing instruments

The amount of the reduction available in respect of para 15X(1)(b) assets is capped with reference to loss absorbing instruments that are not Tier one capital equity and liabilities, and that would otherwise be amongst the group’s chargeable equity and liabilities (para 15X(4)).

The group must first identify the amount of the chargeable UK sub-group or entity’s equity and liabilities, following the adjustments at para 15N(1) Steps 1-2, that is constituted by loss absorbing instruments (para 15V(2), BKLM392000 Loss absorbing instruments issued by overseas subsidiaries: loss absorbing instruments).

They must then remove from this amount any Tier one capital equity and liabilities (para 15V(3) BKLM392000 Loss absorbing instruments issued by overseas subsidiaries: loss absorbing instruments).

They must also remove from this amount any liabilities that do not meet the condition at para 15W(7). For more detail on this condition, see BKLM392000 Loss absorbing instruments issued by overseas subsidiaries: loss absorbing instruments.

This cap provides a maximum amount for the reduction. In practice, if the amount of the para 15X(1)(b) assets is lower than the cap, then the amount of the reduction will be the amount of the para 15X(1)(b) assets.

5. Amount of reduction

The reduction for Tier one equity and liabilities will be the lower of

  • The cap on the reduction available in respect of para 15X(1)(a) assets, as calculated above, and
  • The amount of the para 15X(1)(a) assets.

The reduction for other loss absorbing instruments will be the lower of

  • The cap on the reduction available in respect of para 15X(1)(b) assets, as calculated above, and
  • The amount of the para 15X(1)(b) assets.

The total reduction at Para 15N(1) Step 3 will be the sum of these two figures.

Example

The following is a simplified example designed to illustrate how the reduction at para 15N(1) Step 3 is calculated. To that purpose, it does not use realistic figures in pounds sterling and ignores most other elements of the Bank Levy.

Simplified example: starting situation

This example looks at a single UK sub-group (para 15B). The equity and liabilities of UK entities in the UK sub-group are:

  • 30 Tier one capital equity (after a deduction of 70 for holdings in overseas subsidiaries under Article 36(1)(i) or Article 56(d) CRR),
  • 80 loss absorbing instruments other than Tier one capital equity and liabilities (all of which are long term liabilities), and
  • 1000 short term liabilities.

The assets of UK entities in the UK sub-group include the following holdings in an overseas subsidiary:

  • 70 Tier one capital equity of the overseas subsidiary, and
  • 60 loss absorbing instruments other than Tier one capital equity and liabilities, issued by the overseas subsidiary.
1. Identify UK assets that are loss absorbing instruments

These are the holdings in the overseas subsidiary, as above:

  • 70 equity, and
  • 60 loss absorbing instruments other than Tier one capital equity and liabilities.
2. Stream assets to separate out Tier one instruments
  • Para 15X(1)(a) assets (representing Tier one capital equity and liabilities of overseas subsidiaries): 70 equity.
  • Para 15X(1)(b) assets (representing other qualifying loss absorbing instruments issued by overseas subsidiaries): 60 loss absorbing instruments.
3. Cap amount of reduction: Tier one instruments

The reduction in respect of para 15X(1)(a) assets will be restricted to the amount, if any, of the Tier one capital equity and liabilities (as defined in para 15V(3) taking into account SI2020/1188/REG3) that has not been excluded by para 30. Assuming there has been a deduction from Tier one capital in relation to the holding of 70 equity in the overseas subsidiary, so that 70 of the UK sub-group’s equity is not excluded from charge by para 30, then deductions can be made against that amount of 70 for para 15X(1)(a) assets.

4. Cap amount of reduction: other loss absorbing instruments

The amount of loss absorbing instruments that are not Tier one capital equity and liabilities, and that would otherwise be amongst the group’s chargeable equity and liabilities, is:

  • 80 loss absorbing instruments other than Tier one capital equity and liabilities.

(This example assumes that there has been no reduction in this amount at para 15N(1) Steps 1-2, so that, prior to Step 3, 80 loss absorbing instruments other than Tier one capital equity and liabilities remain within the chargeable equity and liabilities.)

The cap on the amount of the reduction available in respect of para 15X(1)(b) assets (representing other qualifying loss absorbing instruments issued by overseas subsidiaries) is therefore 80. However, this is not the amount of the reduction. It is a cap, or maximum reduction potentially available.

5. Amount of reduction

The reduction for Tier one is the lower of

  • The cap on the reduction available in respect of para 15X(1)(a) assets: this is 70 as calculated above.
  • The amount of the para 15X(1)(a) assets (representing equity holdings in overseas subsidiaries): this is 70

In the case the two are equal so the reduction is 70

The reduction for other qualifying loss absorbing instruments is the lower of

  • The cap on the reduction available in respect of para 15X(1)(b) assets: this is 80, as calculated above.
  • The amount of the para 15X(1)(b) assets (representing other qualifying loss absorbing instruments issued by overseas subsidiaries): this is 60.

The lower amount is 60.

The total reduction for para 15N(1) Step 3 is 130, the sum of the 70 and 60 reductions. This can be used entirely to reduce liabilities other than short term liabilities, since, following para 15N(1) Steps 1-2, the chargeable equity and liabilities of the UK sub-group still include 150 long term liabilities, in the form of the 70 Tier one capital equity and 80 loss absorbing instruments other than Tier one capital equity and liabilities.

A similar analysis to the above example applies if the UK sub-group parent has issued the loss absorbing instruments in question and where the UK sub-group holding the overseas subsidiary has made an entity-by entity election in relation to the UK sub-group, or where the overseas subsidiary is held indirectly by a UK parent entity of the UK sub-group through a designated FPE entity.

Prevention of double counting

Para 15X(5) prevents the use of para 15N(1) Step 3 to obtain a reduction of chargeable equity and liabilities in respect of the same asset more than once.

No further reduction is available at para 15N(1) Step 3 in respect of an asset of a chargeable UK sub-group or entity that is or represents a qualifying loss absorbing instrument issued by an overseas subsidiary if that asset

  • has already been used to calculate a reduction at para 15N(1) Step 3 with regard to another chargeable UK sub-group or entity in the relevant group (para 15X(5)(b)) (that is, it is not possible to obtain a reduction at para 15N(1) Step 3 in respect of the same asset twice), or
  • has been used as part of “M’s net settlement assets” or “B’s net settlement assets” in order to reduce the chargeable equity and liabilities through the netting calculation at either para 15U or para 27D (para 15X(5)(a) and (c)).

The same applies if only part of the asset meets one of the conditions above. No further reduction will be available in respect of that part of the asset.

References to revoked articles in the Capital Requirements Regulation

SI2020/1188/REG3 refers to the provisions of Article 36 of the Capital Requirements Regulation which (as a matter of UK law) were revoked by SI 2021/1078 and should be read as reference to the corresponding provisions in the PRA’s CRR Rules in the PRA Rulebook from 1 January 2022.