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Part II Qualitative Capital Requirements, 2 The Definition of Common Equity Tier 1 Capital and of Contingent Capital

Marco Lamandini, David Ramos Muñoz

From: Capital and Liquidity Requirements for European Banks (1)

Edited By: Bart P.M. Joosen, Marco Lamandini, Tobias H. Tröger

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved.date: 14 April 2024

Subject(s):
Bank supervision — Capital markets — Basel accords — Capital requirement — Leverage

This chapter discusses the interpretation and application of Common Equity Tier 1 (CET1) and Contingent Capital requirements. The path towards Basel III was marked by the 2007–2009 financial crisis, which prioritised the need to enhance soundness, at the expense of clarity and simplicity. Capital rules now have a more restrictive definition of ‘capital’, but also introduce new ratios, such as the equity capital ratio, and the ‘core capital’ ratio, plus the new measures of contingent capital, and the leverage ratio. They all have complicated the definition of what ‘solvency’ means. The chapter then differentiates between Tier 1 and Tier 2 capital, before considering the challenge of setting the optimal minimum requirements. It also defines CET1 capital in Capital Requirements Regulation (CRR) and CRR II and CET1 capital instruments. Finally, the chapter looks at the role of the European Banking Authority (EBA) in terms of CET1 instruments, before focusing on Contingent Convertible Bonds (CoCos). Under Basel III, CoCos must be deeply subordinated, perpetual, and must pay non-cumulative coupons out distributable profits, payable at the discretion of the issuer.

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