Prudential Regulation Authority Rulebook

1.

A firm must calculate the capital requirement for credit and suretyship risk in accordance with the following formula:

$${SCR}_{credit}=\sqrt{{SCR}_{default}^2+{SCR}_{recession}^2}$$

where:

1. (1) SCR_default is the capital requirement for the risk of a large credit default; and
2. (2) SCR_recession is the capital requirement for recession risk.

2.

A firm must calculate the capital requirement for the risk of a large credit default as equal to the loss in its basic own funds that would result from an instantaneous default of the two largest exposures relating to obligations included in lines of business 9 and 21 of the firm and must base this calculation on the assumption that the loss-given-default, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, of each exposure is 10% of the sum insured in relation to the exposure.

3.

The two largest credit insurance exposures referred to in 3A23.2 must be determined based on a comparison of the net loss-given-default of the credit insurance exposures, being the loss-given-default after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles.

4.

A firm must calculate the capital requirement for recession risk as equal to the loss in its basic own funds that would result from an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 100% of the premiums earned by the firm during the following 12 months in lines of business 9 and 21.