Document ID: chunk:federal_register_of_legislation:F2023L00690:front:0:p3
Version: federal_register_of_legislation:F2023L00690
Segment Type: other
Provision Reference: 
Character Range: 5585–8525

using the formula set out in paragraphs 78 to 80, which allows for the likelihood of the scenarios modelled by the stress tests occurring simultaneously. The result of applying the formula is defined as the 'aggregated risk charge component'.

Risk charge components
    10.         The risk charge components are calculated by determining the fall in the capital base of the regulated institution in seven stress tests:
       (a)          'real interest rates' determined in accordance with paragraphs 31 to 36;

       (b)          'expected inflation' determined in accordance with paragraphs 37 to 40;

       (c)          'currency' determined in accordance with paragraphs 41 to 43;

       (d)          'equity' determined in accordance with paragraphs 44 to 47;

       (e)          'property' determined in accordance with paragraphs 48 to 52;

       (f)           'credit spreads' determined in accordance with paragraphs 53 to 64; and

       (g)          'default' determined in accordance with paragraphs 65 to 77.

    These stresses are applied either directly to asset values or by way of changes to economic variables that in turn affect the value of both assets and liabilities. Some assets and liabilities may be impacted by more than one of the seven stress tests and will need to be considered in each relevant stress test. For the stresses in (a), (b) and (c), the impact on the capital base will be two separate amounts and these need to be included in the aggregation formula.
    11.         For the purposes of paragraph 10, no risk charge component may be negative and, therefore, if there is no fall in the capital base of the regulated institution due to the application of the stresses, the risk charge component is assumed to be zero.

Tax benefits
    12.         The risk charge component for each stress test must be calculated so that no value is attributed to any tax benefits that may result from the stress test. However, tax benefits may be deducted from the aggregated risk charge component.
    13.         The tax benefits deducted from the aggregated risk charge component are the tax benefits resulting from scenarios modelled by the stress tests, reduced to allow for the reduction in Asset Risk Charge due to the aggregation formula. The tax benefits are therefore calculated as:

    14.         The tax benefits from paragraph 13 must be recognised as a deduction from the Asset Risk Charge only if tax legislation allows them to be absorbed by the existing deferred tax liabilities. For this purpose, the deferred tax liabilities are those liabilities (if any) that remain after netting off the deferred tax assets and liabilities in the calculation of the deductions from Common Equity Tier 1 Capital in Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital (GPS 112).

Assets and liabilities to be stressed
    15.         In determining each risk charge component,