Calculating the aggregate risk score

Guidance

SoP – Calculating risk-based levies for the Financial Services Compensation Scheme deposits class

Chapter

Calculating the aggregate risk score

Printed on: 08/09/2024

Rulebook at: 01/07/2023

Calculating the aggregate risk score

3.1

For a DGS member that is a CRR firm,1 the calculation of the ARS will be based on the following risk indicators:

Risk indicator	Weight
Leverage ratio	12%
Common Equity Tier 1 (CET1) Ratio	12%
Liquidity coverage ratio (LCR)	24%
Non-performing loans (NPL) ratio	18%
Risk-weighted assets/Total assets	8.5%
Return on assets (RoA)	8.5%
Unencumbered assets/covered deposits	17%
Total	100%

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3.2

Each DGS member will be attributed an individual risk score (IRS) for each risk indicator (calibrated as in paragraph 3.4). The IRS for each risk indicator will then be weighted, as in the table above, to arrive at the ARS for each DGS member that is a CRR firm.

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3.3

Unless otherwise specified, all calculations are performed on each DGS member on a solo consolidated/unconsolidated basis, and terms used are as defined in the CRR.2 To calculate the values of the risk indicators, the PRA will use:

for income statement measures, the value as at (or closest to) 31 December of the preceding year (so the July 2017 levy will use data that firms report as at 31 December 2016); and
for balance sheet measures, the average value at (or closest to) 31 December of the two preceding years (so the July 2017 levy will use data that firms report as at 31 December 2016 and 31 December 2015).

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3.4

The PRA will use the following calibration scales to attribute IRSs for each risk indicator for each DGS member that is a CRR firm in each levy cycle:

(i) Leverage ratio

Bucket	≤3.25%	>3.25%
IRS	100	0

The leverage ratio will be calculated as defined in the PRA Rulebook.

(ii) Common Equity Tier 1 ratio (CET1 ratio)

Bucket	≤7%	>7%
IRS	100	0

CET1 ratio will be calculated as the ratio of CET1 capital to risk-weighted assets^[3]

(iii) Liquidity coverage ratio (LCR)

For the purposes of a levy to be raised in 2017:

Bucket	≤90%	>90%
IRS	100	0

For all subsequent levies:

Bucket	≤100%	>100%
IRS	100	0

Where DGS members have received a waiver from the PRA from meeting liquidity requirements on a solo basis pursuant to Article 8 of the CRR, the LCR risk indicator will be calculated (and calibrated) at the level of the relevant liquidity sub-group.

(iv) Non-performing loans (NPL) ratio

Bucket (by percentile rank)	0–20^th	20^th–40^th	40^th–60^th	60^th–80^th	80^th–100^th
IRS	0	25	50	75	100

NPL ratio will be calculated as the ratio of non-performing loans^[4] to total loans.^[5]

DGS members will be ranked and rated separately based on whether they report FSA015, FINREP F18.00 or only FINREP F1.00 and F7.00 returns.

(v) Risk-weighted assets (RWA)^[6]/total assets^[7]

Bucket (by percentile rank)	0–20^th	20^th– 40^th	40^th– 60^th	60^th–80^th	80^th–100^th
IRS	0	25	50	75	100

DGS members that use the internal ratings based (IRB) approach for calculating minimum own funds requirements will be ranked separately to those DGS members that use the standardised approach. In the calculation of the IRS for this risk indicator, DGS members using the standardised approach will not be rated relative to those using the IRB approach (and vice versa).

(vi) Return on assets (RoA)

Bucket (by percentile rank)	0–20^th	20^th– 40^th	40^th– 60^th	60^th– 80^th	80^th– 100^th
IRS	100	75	50	25	0

RoA will be calculated as the ratio of net income⁸ to total assets^[9], and averaged over two years.

DGS members that are building societies will be ranked and rated separately to other DGS members. In the calculation of the IRS for this risk indicator, building societies will not be rated relative to banks (and vice versa).

(vii) Unencumbered assets/covered deposits

Bucket	≤1	1 – 2	>2
IRS	100	50	0

This indicator is defined as the ratio of total assets less encumbered assets^[10] to covered deposits.^[11]

3. Defined as the ‘total risk exposure amount’, as defined in the CRR.
4. Defined as the sum of the following fields as firms are required to report in form FSA015: 11G, 11Q, 20B, 20D, 23B, 23D, 26B, 26D, 31B, 31C; or row 330, column 060 of F18.00 (FINREP); or row 0190 column 060, row 0190 column 070, row 0190 column 080 and row 0190 column 090 of F7.00 (FINREP).
5. Defined as field 32H as firms are required to report in form FSA015; or row 330, column 01, of F18.00 (FINREP); or the sum of rows 090, 099, 0130, 0144, 0183 as firms are required to report in form F01.01 (FINREP).
6. Defined as in (1) above.
7. Defined as row 380, column 01 of F01.01 (FINREP).
8. Defined as row 355, column 01 of F02.00 (FINREP).
9. Defined as row 380, column 01 of F01.01 (FINREP).
10. As defined in the EBA guidelines on disclosure of encumbered and unencumbered assets; www.eba.europa.eu/documents/10180/741903/EBA-GL-2014- 03 Guidelines on the disclosure of asset encumbrance.pdf/c65a7f66-9fa5-435b-b843-3476a8b58d66.
11. Defined as the class A tariff base, as defined in the Depositor Protection Part of the PRA Rulebook.

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Credit unions

3.5

For a DGS member that is a credit union, the calculation of the ARS will be based on the following risk indicators:

Risk indicator	Weight
Leverage ratio	25%
Liquidity ratio	25%
Non-performing loans (NPL) ratio	25%
Return on assets (RoA)	25%
Total	100%

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3.6

Similar to the approach taken for CRR firms in paragraph 3.2, the PRA will calculate an IRS for each indicator for each DGS member that is a credit union, as calibrated in paragraph 3.8. These IRSs will be weighted as per the table above to derive the ARS.

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3.7

To calculate the values of the risk indicators, the PRA will use:

for income statement measures, the value as of the annual return (Form CY)^[12] the credit union was required to submit in the preceding year (so the July 2017 levy will use data that firms report in 2016); and
for balance sheet measures, the average value using the Form CY returns submitted over the two preceding years (so the July 2017 levy will use data that firms report in 2016 and 2015).

12. Available at www.bankofengland.co.uk/pra/Pages/regulatorydata/formscreditunions.aspx.

01/07/2023

3.8

The PRA will use the following calibration scales to attribute IRSs for each risk indicator for each DGS member that is a credit union in each levy cycle:

(i) Leverage ratio

Bucket
Total assets of less than £5 million or fewer than 5,000 members	≤3%	>3%
Total assets of more than £5 million or more than 5,000 members	≤5%	>5%
Total assets of more than £10 million, more than 15,000 members or undertakes an additional activity other than providing transactional accounts	≤8%	>8%
IRS	100	0

Leverage ratio will be calculated as the ratio of total reserves^[13] to total assets^[14].

(ii) Liquidity ratio

Bucket	≤10%	>10%
IRS	100	0

Liquidity ratio will be calculated as the ratio of liquid assets^[15] to total relevant liabilities^[16].

(iii) Non-performing loans (NPL) Ratio

Bucket (by percentile rank)	0–20^th	20^th–40^th	40^th–60^th	60^th–80^th	80^th–100^th
IRS	0	25	50	75	100

NPL ratio will be calculated as the ratio of total net liabilities in arrears^[17] to total net liabilities^[18].

(iv) Return on assets (RoA)

Bucket (by percentile rank)	0–20^th	20^th–40^th	40^th–60^th	60^th–80^th	80^th–100^th
IRS	100	75	50	25	0

RoA will be calculated as the ratio of profit/loss after tax excluding grant income^[19] to total assets^[20].

13. Defined as the sum of fields F1, F2, F7 and F8 in Form CY.
14. Defined as field C16 in Form CY.
15. Defined as field P1 in Form CY.
16. Defined as field P5 in Form CY.
17. Defined as the sum of fields H4, H6, H8 and H10 in Form CY.
18. Defined as field H2 in Form CY.
19. Defined as field L3 less field J6 in Form CY.
20. Defined as in (2) above.

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Overseas firms

3.9

For a DGS member which is an overseas firm, the PRA will attribute an ARS of 50.

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Other provisions

3.10

If, at any point, the PRA is unable to calculate the ARS for any DGS member in line with the methodology stated in this chapter (for example, if a DGS member has failed to make a regulatory data submission), the PRA will attribute that DGS member with the highest ARS of 100. This is separate to the provisions of Depositor Protection 44.4, which applies if a firm does not submit a complete statement of business (measured in accordance with the class A tariff base) to the FSCS in accordance with Depositor Protection 44.2.

01/07/2023

SoP – Calculating risk-based levies for the Financial Services Compensation Scheme deposits class

Calculating the aggregate risk score

Calculating the aggregate risk score

Footnotes

Credit unions

Footnotes

Footnotes

Overseas firms

Other provisions