Common Equity Tier 1 Capital Requirements

Extract

[...] On the other hand, outside the financial sector, this legitimacy is questioned. This rule has significant repercussions. Even stricter measures apply to insurance companies under the Solvency II directive, this which reduces the possibilities for banks and insurers to finance the general economy. The impact is thus very visible. Traditionally, large insurance companies and credit institutions played a preponderant institutional role as investors in the financial sector. Although they continue to assume this role, the constraints related to prudent ratios now limit their capacity. [...]

[...] In case of dissolution, this capital thus generated has no value. In a context of restructuring or liquidation, one examines the capital holders and finds that among them is the bank itself, through its subsidiaries or in the form of self-held shares. Could the equity held by subsidiaries then absorb the liabilities? No, for it is precisely the troubled institution that faces the resolution procedure. Therefore, it is the interests of third parties that must be solicited to cover the liabilities, and not the circulating funds financed by the institution itself. [...]

[...] If we can't preserve anything, we liquidate the company and sell all the assets to pay the debt. That's not the subject. The idea is to know whether we should not deduct these elements from equity elements, there no reason to habitually deduct equity elements of the value of the asset elements. Here, the idea is to say for prudence, we will deduct from equity the value of the asset elements called intangible because we know that their ability to absorb a liability is less that tangible assets that pose fewer evaluation problems, in order to present more equity to the credit institution. [...]

[...] the intangible elements recorded in the balance sheet. Why? Because we consider that these intangible assets pose certain difficulties in evaluation. We estimate that they are not not robust enough not to be deducted from the amount of equity. This is really a question of evaluation. It is estimated that the evaluation of intangible assets is potentially subject to discussion. What is true, if we have 100 million on an account, it is worth 100 million, whereas intangible assets are not robust enough. [...]

[...] Deductions Once we have determined the amount of these eligible own funds for the qualification of Common Equity Tier 1 capital, CRR adds requirements. In fact, it must proceed to deductions (article 36 of the CRR). If an institution has a capital of 100 million million in reserves and 50 million in retained earnings. Which makes a total of 200 million, we must deduct a certain number of things from these 200 million, which will allow us to determine the final amount of the basic category 1 own funds. [...]