CA-2 CA-2 Regulatory Capital
CA-2.1 CA-2.1 Regulatory Capital
Tier 1: Core Capital
CA-2.1.1
Tier 1 capital shall consist of the sum of items (a) to (f) below, less the sum of items (g) to (k) below:
(a) Issued and fully paid ordinary shares and perpetual non-cumulative preference shares, but excluding cumulative preference shares;(b) Certain innovative capital instruments such as instruments with step-ups, subject to the fulfilment of criteria given in paragraph CA-2.1.2 to CA-2.1.4 and the limit given in paragraph CA-2.2.2.(c) Disclosed reserves, including:• General reserves• Legal / statutory reserves• Share premium• Capital redemption reserve• Excluding fair value reserves3(d) Retained profit brought forward;(e) Unrealized net gains arising from fair valuing equities4; and(f) Minority interest in subsidiaries Tier 1 equity. arising on consolidation, in the equity of subsidiaries which are less than wholly owned. Further guidance on minority interests is provided in paragraphs PCD-A.2.11, PCD-1.1.3 and PCD-1.1.4 of the Prudential Consolidation and Deduction Requirements Module.LESS:
(g) Goodwill;(h) Current interim cumulative net losses;(i) Unrealized gross losses arising from fair valuing equity securities5;(j) Other deductions made on a pro-rata basis between Tier 1 and Tier 2;(k) Reciprocal cross holdings of other banks' capital.
3 This refers to unrealised fair value gains reported directly in equity (such gross gains are included in Tier 2).
4 This refers to unrealised net fair value gains taken through P&L (which have been audited). Please note that the unrealised net gains related to unlisted equities taken through P&L arising on or after January 1, 2008 will be subject to 55% discount as stated in CA-2.1.5(c)ii.
5 This refers to both 'net losses taken through P&L' and 'gross losses reported directly in equity'.
Apr 08CA-2.1.2
Certain innovative capital instruments agreed to on a case by case basis by CBB, where the underlying instrument meets the following requirements which must, at a minimum, be fulfilled by all instruments in Tier 1:
(a) Issued and fully paid;(b) Non-cumulative;(c) Able to absorb losses within the bank on a going-concern basis;(d) Junior to depositors, general creditors, and subordinated debt of the bank;(e) Permanent;(f) Neither be secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors;(g) Callable at the initiative of the issuer only after a minimum of five years, with CBB approval and under the condition that it will be replaced with capital of same or better quality, unless the CBB determines that the bank has capital that is more than adequate to cover its risks.(h) The main features of such instruments must be easily understood and publicly disclosed;(i) Proceeds must be immediately available without limitation to the issuing bank;(j) The bank must have discretion over the amount and timing of distributions, subject only to prior waiver of distributions on the bank's common stock, and banks must have full access to waived payments; and(k) Distributions can only be paid out of distributable items; where distributions are pre-set they may not be reset based on the credit standing of the issuer.Apr 08CA-2.1.3
Moderate step-ups in such instruments meeting the requirements set forth above, are permitted, in conjunction with a call option, only if the moderate step-up occurs at a minimum of ten years after the issue date and if it results in an increase over the initial rate that is no greater than either;
(a) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis; or(b) 50% of the initial credit spread, less the swap spread between the initial index basis and the stepped-up index basis.Apr 08CA-2.1.4
The terms of the instrument should provide for no more than one rate step-up over the life of the instrument. The swap spread should be fixed as of the pricing date and reflect the differential in pricing on that date between the initial reference security or rate and the stepped-up reference security or rate.
Apr 08Tier 2: Supplementary Capital
CA-2.1.5
Tier 2 capital shall consist of the following items:
(a) Current interim profits which have been reviewed as per the ISA by the external auditors;(b)Asset revaluation reserves which arise from the revaluation of fixed assets from time to time in line with the change in market values, and are reflected on the face of the balance sheet as a revaluation reserve. Similarly, gains may also arise from revaluation of Investment Properties (real estate). These reserves (including the net gains on investment properties) may be included in Tier 2 capital, with the concurrence of the external auditors, provided that the assets are prudently valued, fully reflecting the possibility of price fluctuation and forced sale. A discount of 55% must be applied to the difference between the historical cost book value and the market value to reflect the potential volatility of this form of unrealised capital;(c) Unrealized gains arising from fair valuing equities:(i) For unrealized gross gains reported directly in equity, a discount factor of 55% will be applied before inclusion in Tier 2 capital. Note for gross losses, the whole amount of such loss should be deducted from the Tier 1 capital;(ii) For unrealized net gains reported in income, a discount factor of 55% will apply on any such unrealized net gains from unlisted equity instruments before inclusion in Tier 1 capital (for audited gains) or Tier 2 capital (for reviewed gains) as appropriate. This discount factor will be applied to the incremental net gains related to unlisted equities arising on or after January 1, 2008;(d) Banks should note that the Central Bank will discuss the applicability of the discount factor under paragraph (c) above with individual banks. This discount factor relating to CA-2.1.5(c)ii may be reassessed by the CBB if the bank arranges an independent review (which has been performed for the bank's systems and controls relating to FV gains on financial instruments) and meets all the requirements of the paper 'Supervisory guidance on the use of the fair value option for financial instruments by banks' issued by Basel Committee on Banking Supervision in June 2006;(e) Banks applying the IRB approach for securitisation exposures or the PD/LGD approach for equity exposures must first deduct the expected loss (EL) amounts subject to the corresponding conditions in paragraphs CA-6.4.4 and CA-5.7.13, respectively. Banks applying the IRB approach for other asset classes must compare (i) the amount of total eligible provisions, as defined in paragraph CA-5.7.7, with (ii) the total expected losses amount as calculated within the IRB approach and defined in paragraph CA-5.7.2. Where the total expected loss amount exceeds total eligible provisions, banks must deduct the difference. Deduction must be on the basis of 50% from Tier 1 and 50% from Tier 2. Where the total expected loss amount is less than total eligible provisions, as explained in paragraphs CA-5.7.7 to CA-5.7.10, banks may recognise the difference in Tier 2 capital up to a maximum of 0.6% of credit risk-weighted assets. The provisions in excess of 0.6% of credit risk-weighted assets will be deducted from the risk-weighted assets of the related portfolio to which these provisions relate;(f)Hybrid instruments , which include a range of instruments that combine characteristics of equity capital and debt, and which meet the following requirements:• They are unsecured, subordinated and fully paid-up;• They are not redeemable at the initiative of the holder or without the prior consent of the CBB;• They are available to participate in losses without the bank being obliged to cease trading (unlike conventional subordinated debt); and• Although the capital instrument may carry an obligation to pay interest that cannot permanently be reduced or waived (unlike dividends on ordinary shareholders' equity), it should allow service obligations to be deferred (as with cumulative preference shares) where the profitability of the bank would not support payment. Cumulative preference shares, having the above characteristics, would be eligible for inclusion in Tier 2 capital. Debt capital instruments which do not meet the above criteria may be eligible for inclusion in item (g);(g) Subordinated term debt, which comprises all conventional unsecured borrowing subordinated (with respect to both interest and principal) to all other liabilities of the bank except the share capital and limited life redeemable preference shares. To be eligible for inclusion in Tier 2 capital, subordinated debt capital instruments should have a minimum original fixed term to maturity of over five years. During the last five years to maturity, a cumulative discount (or amortisation) factor of 20% per year will be applied to reflect the diminishing value of these instruments as a continuing source of strength. Unlike instruments included in item (f) above, these instruments are not normally available to participate in the losses of a bank which continues trading. For this reason, these instruments will be limited to a maximum of 50% of Tier 1 capital. Subordinated debt instruments must also satisfy the conditions outlined in paragraphs CA-2.1.2 (a), (f), (h), (i), (j), CA-2.1.3 and CA-2.1.4; and(h) Loan loss provisions held against future, presently unidentified losses and are freely available to meet such losses which subsequently materialise. Such general provisions/general loan-loss reserves eligible for inclusion in Tier 2 will be limited to a maximum of 1.25 percentage points of credit risk-weighted risk assets. Provisions ascribed to identified deterioration of particular assets or known liabilities, whether individual or grouped, must be excluded.Amended: October 2013
Amended: April 2013
Amended: April 2011
Apr 08CA-2.1.5A
A bank may not exercise a call on a subordinated debt issue, partially or in full, prior to the end of its term, unless it has received the CBB's prior written approval, and there is a clear statement in support of the call in the original documentation.
Added: April 2013CA-2.1.5B
Where Paragraph CA-2.1.5A applies, the CBB will take into consideration whether the bank has received confirmation from its external auditor that the bank will continue to satisfy the CBB's capital adequacy requirements after such early call and the bank has sufficient liquidity to repay the debt. This can be done by assessing the impact of such redemption on the capital adequacy ratio of the bank.
Added: April 2013Tier 3: Market Risk Ancillary Capital
CA-2.1.6
Tier 3 capital will consist of short-term subordinated debt which, if circumstances demand, must be capable of becoming part of the bank's permanent capital and thus be available to absorb losses in the event of insolvency. It must therefore, at a minimum, meet the following conditions:
(a) Be unsecured, subordinated and fully paid up;(b) Have an original maturity of at least two years;(c) Not be repayable before the agreed repayment date; and(d) Be subject to a lock-in clause which stipulates that neither interest nor principal may be paid (even at maturity) if such payment means that the bank falls below or remains below its minimum capital requirement.Apr 08CA-2.2 CA-2.2 Limits on the Use of Different Forms of Capital
Tier 1: Core Capital
CA-2.2.1
Tier 1 capital must represent at least half of the total eligible capital after all adjustments to all elements of capital, have been made. i.e., the sum total of Tier 2 plus Tier 3 eligible capital must not exceed total Tier 1 eligible capital.
Apr 08CA-2.2.2
The CBB expects banks to meet the minimum CARs without undue reliance on innovative instruments, including instruments that have a step-up. Accordingly, the aggregate of issuances of non-common equity Tier 1 instruments with any explicit feature, (other than a pure call option), which might lead to the instrument being redeemed is limited (at issuance) to 15% of the consolidated bank's Tier 1 capital.
Apr 08CA-2.2.3
The limits on innovative Tier 1 instruments and Tier 2 subordinated debt are based on the amount of Tier 1 capital after deduction of goodwill pursuant to the Prudential Consolidation and Deduction Requirements Module (see Appendix CA-1 for an example how to calculate the 15% limit for innovative Tier 1 instruments and Appendix PCD-2 of PCD module for an example of the deduction effects and the caps).
Apr 08Tier 2: Supplementary Capital
CA-2.2.4
Tier 2 elements may be substituted for Tier 3 up to the Tier 3 limit of 250% of Tier 1 capital (as below) in so far as eligible Tier 2 capital does not exceed total Tier 1 capital, and long-term subordinated debt does not exceed 50% of Tier 1 capital after deduction of goodwill.
Apr 08Tier 3: Ancillary Capital
CA-2.2.5
Tier 3 capital is limited to 250% of a bank's Tier 1 capital that is required to support market risks. This means that a minimum of about 28.57% of market risks needs to be supported by Tier 1 capital that is not required to support risks in the remainder of the book.
Apr 08CA-2.2.6
Banks are entitled to use Tier 3 capital solely to support market risks as defined in chapters CA-9 to CA-14. This means that any capital requirement arising in respect of credit and counterparty risk, including the credit counterparty risk in respect of derivatives in both trading and banking books, needs to be met by Tier 1 and Tier 2 capital.
Apr 08
