Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.4.2:2.4.2 Pillar 1 requirements

Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.4.2

2.4.2 Pillar 1 requirements

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The Pillar 1 requirements contain the minimum capital requirements for banks.1 These minimum capital requirements relate to the Tier 1 capital and Tier 2 capital (together: the Total Capital) that a bank has to maintain. The Tier 1 capital of a bank consists of the sum of Common Equity Tier (CET) 1 capital and Additional Tier (AT) 1 capital.2 At all times, banks have to satisfy the following regulatory capital requirements expressed as a percentage of the TREA:3

a)

CET 1 Capital Ratio of 4.5%;

b)

Tier 1 Capital Ratio of 6%; and

c)

Total Capital Ratio of 8%.

According to Joosen, the subordinated nature of claims exercisable by holders of CET 1, AT 1 and Tier 2 capital is the most important and central criterion outlined in the regulations of this subject matter. This subordination is layered, since CET 1 capital is more subordinated than AT 1 capital and Tier 2 capital is less subordinated than AT 1 capital.4 CET 1 capital is the primary source of loss absorption and thus the most expensive form of regulatory capital to be attracted by banks.5 AT 1 capital is considered going-concern capital, as a result of the conditions in relation to the minimum trigger event, as further discussed in section 2.4.2.2.6 Tier 2 capital should be seen as ‘gone concern’ capital, because it is only available when the bank is wound up in normal insolvency proceedings or liquidated.

CRR II introduces a change in the definition of AT 1 and Tier 2 capital as a result of which the law or contractual provisions governing AT 1 and Tier 2 instruments should require that, upon a decision by the resolution authority to exercise the write down and conversion powers referred to in Article 59 of the BRRD (the so-called PONV conversion power)7, the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted to CET 1 instruments.8

2.4.2.1 CET 1 capital2.4.2.2 AT 1 capital2.4.2.3 Tier 2 capital

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