Own funds (credit institution)

As equity in is banking the capital of credit institutions referred. They have to have adequate own funds in order to be able to meet their obligations towards their creditors (investors) at any time.

General

While there are no regulatory provisions on capital resources for non-banks other than minimum capital in corporations ( share capital , share capital ), the legislator considered it necessary for credit institutions and insurance companies ( own funds (insurance) ) to regulate the special risks of banking and insurance business adopt the amount and adequacy of equity. This happened for the first time through the Banking Act (KWG) of December 1934, which required compliance with an equity ratio in section 11 of the KWG ; section 11 (2) of the KWG 1934 introduced the term “liable equity”. It took into account the experience of the German banking crisis of June 1931, in which a large number of credit institutions had invested too large a portion of their own funds or even all of their own funds in just one or very few loan exposures.

In accordance with the preamble to the Capital Adequacy Directive, capital resources are intended to ensure the continued activity of credit institutions and protect savers.

Functions

Like the equity of non-banks, the equity of credit institutions also fulfills several functions:

• Founding function : According to Section 33 (1) No. 1 KWG, establishing a bank requires “sufficient initial capital, consisting of core core capital”, which for CRR credit institutions must be at least 5 million euros (Section 33 (1d) KWG). According to Section 2 (1) No. 1 of the Pfandbrief Act , mortgage banks must have at least core capital of 25 million euros. The start-up capital is used, among other things, to finance the first start-up investments.
• Financing function : On the one hand, equity finances long-term property, plant and equipment and the investments of credit institutions within the framework of the golden balance sheet rule; on the other hand, these balance sheet items are included in the central concept of the risk position , which must be backed with own funds.
• Liability function : own funds should serve to absorb intertemporal losses and protect depositor . Any losses incurred are absorbed by equity. The higher the equity, the longer a company can cope with persistent losses without falling into a corporate crisis. Since equity is “at the very end of the rankings of liquidation or insolvency-related repayment”, it is liable to the creditors and thus ensures the basis of creditors' protection.
• Limiting function : The amount of own funds specifically limits the risk positions and generally the possible business volume of a bank. Building up a loan portfolio is only permitted up to a specified limit for the core capital ratio that is dependent on the equity capital. Large exposures are subject to a specific limit , the amount of which, according to Art. 395 Capital Adequacy Ordinance (CRR), may not exceed 25% of the eligible capital. According to Section 4 of the PfandBG, at least 100% of the Pfandbriefe in circulation must be covered at all times by means of “ordinary cover assets” ( real estate liens , ship and aircraft mortgages ). As these cover assets are in turn linked to the own funds, this also has a limiting function.
• Assessment function for the distribution of profits : The equity share of an individual shareholder forms the calculation basis for the distribution of profits and losses. In the case of corporations in particular, the amount of dividends is based on the share capital .
• Representation and advertising function : The absolute amount of own funds as risk capital can be presented to the public with the help of advertising and create trust in the solvency of the institute. The core capital ratio allows conclusions to be drawn about the quality of an institution. The available own funds are an essential criterion for the creditworthiness and the rating .

Legal issues

Is central provision for definition, scope and limits of own resources since January 2014, applicable at European level Kapitaladäquanzverordnung (abbreviation CRR) in which the own resources are defined as the sum of core capital and supplementary capital (Art. 4 para. 1, no. 118, Art 72 CRR). The requirement formulated in section 10 (1) sentence 1 KWG for the banks to have adequate equity capital resources merely reflects a qualitative structural norm under banking supervisory law. The provision of Section 10 of the KWG - the central quantitative regulation for the presentation of equity capital before 2014 - now only refers to the Capital Adequacy Ordinance and empowers the Federal Minister of Finance to issue statutory ordinances with regard to the solvency of institutions. She expressly emphasizes the safeguarding of the assets entrusted to the institutes and thus the idea of ​​creditor protection. The protection of creditors serves to ensure confidence in the banking system. In turn, trust is an essential prerequisite for the stability of a modern financial system.

The indefinite legal concept of appropriateness generally represents a specific relationship between two reference values. In terms of tax law, equity capital for non-banks that is comparable with the capital structure of similar companies in the private sector in the relevant period is considered appropriate. According to R 33 (2) KStR, non-banks have adequate equity capital if their equity is at least 30% of the assets. With regard to the cited BFH case law, this 30 percent limit is primarily to be understood as a non-acceptance limit, so there is no objection to its fulfillment in external tax audits.

In contrast, what is “appropriate” for credit institutions is determined on the basis of superordinate banking supervisory principles. When issuing a banking license, BaFin checks the adequacy of the own funds on a case-by-case basis. Both the KWG (Section 10 , Section 10a Paragraph 4 and Paragraph 8 KWG) and Art. 1 CRR speak of the "adequacy of own funds" and understand this to mean the solvency of credit institutions. To ensure “adequate solvency”, according to No. 40 preamble of the CRR, when determining capital adequacy requirements, it is important to ensure that assets and off-balance sheet items are weighted appropriately . The capital requirements should be proportionate to the respective risks. In particular, they should take into account the fact that a large number of relatively small loans have a risk-reducing effect ( granularity ; No. 43 preamble). The adequacy of own funds is shown in an absolute (minimum equity according to KWG and PfandbriefG) and relative amount (CRR).

The minimum requirements for risk management (MaRisk) assess appropriateness in terms of risk-bearing capacity. According to No. 1 AT 4.1 MaRisk (BA), it must be "ensured that the major risks of the credit institution are continuously covered by the risk coverage potential ... and that the risk-bearing capacity is therefore given". This is also required by section 25a (1) sentence 3 KWG. The risk-bearing capacity of credit institutions required by banking supervisory law aims to protect depositors and their financial investments. Risk-bearing capacity in this sense means the maximum possible resilience of the equity of a credit institution through losses incurred from the risks taken.

Calculation of own funds

The own funds of credit institutions are determined as follows:

Own funds are the sum of core capital and supplementary capital (Art. 4 Para. 1 No. 118, Art. 72 CRR), eligible own funds are according to Art. 4 Para. 1 No. 71 CRR, core capital (Art. 25 CRR) and supplementary capital (Art. 71 CRR) in the amount of a maximum of 1/3 of the core capital. The starting point is therefore the core capital, which according to Art. 25 CRR is made up of “common core capital” and “additional core capital”. The "hard core capital" consists of:

   Gezeichnetes Kapital (je nach Rechtsform heißt es Grundkapital, Stammkapital, Sicherheitsrücklage, Geschäftsguthaben)
   + Agio (Aufgeld aus der Überpariemission von Aktien)
   + einbehaltene Gewinne
   + sonstige Rücklagen
   + Fonds für allgemeine Bankrisiken (nach § 340g HGB)
   + Einlagen stiller Gesellschafter (nicht bei Aktiengesellschaften)
   = hartes Kernkapital

From the intermediate level of Common Equity Tier 1 capital, taking into account correction items, the eligible equity capital results:

   Hartes Kernkapital
   - Abzugsposten nach Art. 36 ff. CRR (u. a. Verluste, immaterielle Vermögenswerte,
     aktive latente Steuern, Vorleistungen nach Art. 379 Abs. 3 CRR)
   + zusätzliches Kernkapital nach Art. 51 CRR („Kapitalinstrumente“)
   - Abzugsposten nach Art. 56 ff. CRR (u. a. bestimmte synthetische Positionen)
   = Kernkapital
   + Ergänzungskapital nach Art. 62 CRR (u. a. Vorsorgereserven nach § 340f HGB, kumulative Vorzugsaktien, Genussrechtskapital,
     langfristige Nachrangverbindlichkeiten)
   - Abzugsposten nach Art. 66 ff. CRR (u. a. bestimmte synthetische Positionen)
   = Eigenmittel (zur Risikounterlegung)
   - Ergänzungskapital, dessen Betrag >1/3 des Kernkapitals beträgt
   = anrechenbare Eigenmittel / Gesamtkapital (als Bezugs- und Bemessungsgröße etwa für die Großkreditberechnung)

Remarks:

• Supplementary capital: This includes provision reserves in accordance with Section 340f of the German Commercial Code (HGB), which are not based on a decrease in the value of assets and can therefore also be realized in the event of liquidation .
• To be recognized as equity capital, profit participation capital must meet the characteristics of self-financing instruments (participation in ongoing losses, subordinate servicing, durability, original term at least 5 years).
• Revaluation reserves : According to the CRR, the revaluation reserve that can be counted as own funds and the liability surcharge are no longer provided as own funds. However, a transitional provision running until 2022 provides for their degressive crediting.
• In addition, cumulative preference shares at their respective nominal values ​​count as tier 2 capital.
• Subordinated liabilities are recognized as supplementary capital if the following criteria are met, including profit participation rights and subordinated savings bonds :
  • In the event of insolvency , they must be satisfied subordinately .
  • The original term or the period of notice must be at least 5 years.
  • Liabilities can not be offset against the bank's claims .
  • These conditions may not be changed subsequently.

Backing with own funds

The “eligible own funds” calculated in this way are compared with the risk positions, whereby in addition to the credit risks (Articles 111-134 and 143-191 CRR) also the market risks (Articles 325 ff. CRR) and operational risk (Art. 315 ff . CRR) are to be backed with own funds.

According to Art. 92 No. 3 CRR, credit institutions must meet the following capital adequacy requirements at all times from January 2019:

• Common Equity Tier 1 ratio : at least 4.5%,
• Core capital ratio : at least 6% and
• Total capital ratio (= eligible own funds): at least 8% of the total exposure amount

The total claim amount is then calculated as follows:

    Risikogewichtetes Kreditrisiko
    + Überschreitungen der Großkreditobergrenzen
    + Fremdwährungsrisiko
    + Abwicklungsrisiko
    + Warenpositionsrisiko
    + Derivaterisiko
    + Marktrisiko
    + operationelles Risiko
    = Gesamtforderungsbetrag

The risk-weighted credit risk is not taken into account with the nominal amount of the loan portfolio, but according to the exposure class and the rating-weighted nominal amount. If the ratings within the loan portfolio deteriorate in general , banks have to back this loan portfolio with more equity and vice versa. For example, loans to states and their central banks in the EU member states that are denominated in the national currency of this state and are refinanced in this currency are given a risk weight of 0% (Art. 114 No. 4 CRR), so they do not have to be backed by own funds . All other positions must be backed with own funds, in the most extreme case for securitisations with 1250% of their rating-weighted nominal amount.

For example, if a credit institution has total capital of 10 million euros, it may show a total exposure amount of a maximum of 125 million euros (with 100% offsetting, rating-weighted credit risk) in the balance sheet , because 8% of the total exposure amount results in eligible capital of 10 million euros. The own funds are the decisive bottleneck and growth factor in the loan portfolio in terms of volume and structure, which lead to quotas.

Accounting

→ Main article : "Differentiation from borrowed capital" in the equity article

When accounting for equity, the differences between commercial and banking regulatory equity come to light. Basically, the general balance sheet classification applies to credit institutions under commercial law initially to § 266 para. 3 A HGB , according to which the equity of subscribed capital , capital reserves , retained earnings , profits carried forward / loss carried forward and retained earnings / accumulated deficit is composed. Even with non-banks, the loss positions lead to an equity deduction because of their negative sign. In accordance with Section 25 (1 ) of the Financial Institution Accounting Ordinance (RechKredV), sub-item letter a "Subscribed capital" - regardless of their precise designation in individual cases - all amounts that are considered to be equity amounts subscribed by the shareholders or other owners , depending on the legal form of the institution, are bank- specific . This also includes contributions from silent partners, endowment capital and business credits. In sub-item letter c “Revenue reserves”, the security reserve of the savings banks and the profit reserves of the credit unions must also be shown in accordance with Section 25 (2) RechKredV.

As with other companies, mezzanine capital is also the main problem area in the banking industry. This hybrid core capital has largely been omitted as an equity component of banks. In particular, profit participation capital and long-term subordinated liabilities (Art. 66 CRR) are retained as supplementary capital if they meet the requirements of Art. 63 CRR. This includes in particular an original term of at least 5 years. Intangible assets and deferred tax assets are to be deducted from Common Equity Tier 1 capital; Equity investments also if they exceed 10% of Common Equity Tier 1 capital (“significant investments”). According to Art. 484 f. CRR continues as equity components the contingency reserves according to § 340f HGB, the profit participation capital, the subordinated liabilities, the contributions of silent partners and the liability surcharge. They initially remain recognized through a grandfathering with linearly decreasing odds. Eligible own funds may include supplementary capital up to the following amount:

• between January 2015 and December 2015: 75% of core capital,
• between January 2016 and December 2016: 50% of core capital

Unbound provision reserves according to § 340f HGB (only in the commercial balance sheet) can be set up indefinitely, but only belong up to 1.25% of the risk-weighted exposure amount for the credit risk to Common Equity Tier 1 capital, the "Fund for general banking risks" according to § 340g HGB belongs to full amount to core capital. The previous reserves according to Section 26a KWG a. F. are no longer an equity component.

Common Equity Tier 1 capital includes some “capital buffers”. According to Section 10c KWG, a “capital conservation buffer” must be created, which must consist of hard core capital and must reach at least 2.5% of the total amount receivable.

In addition, in accordance with Section 10d KWG, a “countercyclical capital buffer” consisting of hard core capital, again amounting to 2.5% of the total amount due, must be created.

Furthermore, the BaFin can set a “capital buffer for systemic risks” in accordance with Section 10e KWG. A “capital buffer for globally systemically important institutions” is to be set up in accordance with Section 10f KWG and for “otherwise systemically important institutions” in accordance with Section 10g KWG if the requirements are met.

Key figures

The following ratios result as business indicators , which must not fall below the minimum ratios listed in Art. 92 No. 3 CRR:

${\displaystyle {\begin{aligned}{\text{Harte Kernkapitalquote}}&={\frac {\text{hartes Kernkapital}}{\text{Gesamtforderungsbetrag}}}\\{\text{Kernkapitalquote}}&={\frac {\text{Kernkapital}}{\text{Gesamtforderungsbetrag}}}\\{\text{Gesamtkapitalquote}}&={\frac {\text{Gesamtkapital}}{\text{Gesamtforderungsbetrag}}}\end{aligned}}}$

In addition to the regulatory requirements, these key figures also serve to compare operations and are part of the rating of rating agencies .

Others

The term “adequate equity” is made operable through the measure of economic capital . With the help of this metric, the amount of equity required is determined, which must be able to absorb extreme unexpected losses from the loan portfolio . “Extreme” denotes a confidence level of at least 99.5% for the economic capital determined. This means that the unexpected losses occurring within a year are covered by equity with a probability of 99.5% or more.

After the 1959 by Wolfgang Stützel established maximum load theory 's own resources must be sufficient in an extreme scenario, in order for a bank rush the liquidation absorb losses, of the sale of assets for repayment of bank deposits occurs. "The sum of the losses that have to be accepted in the event of such an early assignment of certain assets must never be greater than the equity". The own funds therefore represent a liquidation cushion for the maturity transformation risks assumed by banks .

literature

• Beck, Samm, Kokemoor: Law on the Credit System . KWG commentary with materials and additional regulations. CF Müller, Heidelberg [loose-leaf collection, 129th update February 2008], ISBN 978-3-8114-5670-9 .
• Deutsche Bundesbank, explanations on own funds bundesbank.de (PDF)

Individual evidence

1. ↑ Christoph Müller, The emergence of the Reichsgesetz über das Kreditwesen of December 5, 1934 , 2003, p. 219
2. ↑ Christoph Müller, The emergence of the Reich Law on the Credit System of December 5, 1934 , 2003, p. 238
3. ↑ consisting of the directives 2006/48 / EC and 2006/49 / EC of June 14, 2006
4. ↑ Own Funds Directive, 1989, p. 118
5. ↑ Wolfgang Grill / Ludwig Gramlich / Roland Eller, Gabler Bank Lexikon: Bank, Börse ,finanz , 1995, p. 495 ff.
6. ↑ Günter Wöhe, Introduction to General Business Administration , 25th edition, 2013, p. 542
7. ↑ Horst S. Werner, Equity Financing , 2006, p. 23
8. ^ Rainer Smola, Comment on Pfandbrief Act , 2014, pp. 19, 21.
9. ↑ cf. also BT-Drucksache 3/1114 of May 25, 1959, reasons for the draft law on the credit system, p. 3.
10. ↑ BFH judgments of September 1, 1982 BStBl. 1983 II, p. 147 and of July 9, 2003 BStBl. 2004 II, p. 425
11. ↑ Axel Becker: Audit of the lending business by the internal audit , 2007, p. 103.
12. ↑ General Banking Management , 2014, p. 19.
13. ↑ Olaf Fischer, General Bank Management , 2014, p. 32.
14. ↑ Torben Mothes, final exams: general banking management, business management, economics, law , 2015, p. 22.
15. ↑ Wolfgang Stützel: Is the “golden banking rule” a suitable guideline for the business policy of credit institutions? , in: Lectures for Sparkasse Auditors, 1959, p. 43

Please note the information on legal issues!