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Capital and Liquidity Requirements for European Banks »

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

Part III Quantitative Capital Requirements, 14 Capital Buffers for Systemically Important Banks and the Systemic Risk Buffer »

Tobias H. Tröger
From: Capital and Liquidity Requirements for European Banks (1)
Edited By: Bart P.M. Joosen, Marco Lamandini, Tobias H. Tröger
This chapter highlights the capital buffer requirements that specifically address systemic risks that either flow from an institution’s indispensable position in the financial system (i.e., globally and other systemically important institutions, G-SIIs and O-SIIs) or from sector-wide risks that potentially afflict all, or a systemically relevant fraction of, banks. It begins by looking at the regulatory rationale that underpins the Basel Committee on Banking Supervision (BCBS) recommendations and their European implementation. The chapter then considers the interrelationship between buffer and other capital requirements. Where a group, on a consolidated basis, is required to maintain both a G-SII buffer and an O-SII buffer, only the higher of the two shall apply. Where an O-SII is the subsidiary of a G-SII or of an institution or of a group headed by an EU parent institution, the O-SII buffer rate that applies to the subsidiary on an individual or sub-consolidated basis is restricted, reflecting the additional loss-absorbing capacity that stems from the entity’s group affiliation.

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Edited By: Bart P.M. Joosen, Marco Lamandini, Tobias H. Tröger
From: Capital and Liquidity Requirements for European Banks (1)
Edited By: Bart P.M. Joosen, Marco Lamandini, Tobias H. Tröger

Part II Qualitative Capital Requirements, 4 Qualitative Capital Requirements and their Relationship with MREL/TLAC »

Tobias H. Tröger
From: Capital and Liquidity Requirements for European Banks (1)
Edited By: Bart P.M. Joosen, Marco Lamandini, Tobias H. Tröger
This chapter investigates the relationship of qualitative capital requirements with total loss absorbing capacity (TLAC)/minimum requirement for own funds and eligible liabilities (MREL). The resulting rather complex, multi-layered structure established under Basel III and further refined under the Basel III Accord’s finalization (commonly referred to as ‘Basel IV’) reflects proportionality considerations and seeks to accommodate banks’ desire to retain sufficient leeway to choose from a mix of capital and (hybrid) debt instruments to fulfil regulatory capital requirements. The chapter begins with a critical review of the functional rationale that underpins capital-reliant banking regulation, which serves as the focal point for a normatively guided interpretation of the regulatory framework. It then identifies the key determinants for the actual loss-absorbing capacity of institutions’ CET1, AT1, and T2 capital, as well as their TLAC/MREL items. Finally, the chapter looks into issues regarding the relationship between the multiple layers of regulatory capital such as the stacking order of capital requirements and the restrictions on double-gearing of capital.