Core capital ratio

from Wikipedia, the free encyclopedia

In the banking sector , the core capital ratio is an economic key figure that indicates the proportion of risk positions covered by own funds , subject to credit and risk-bearing in a bank balance sheet , in particular the proportion of lending business . A similar key figure used in particular by non-banks is the equity ratio .

General

The equity is available for all company types "in the ranking point of liquidations - or insolvency related repayability the very end", liable to creditors, thus providing the basis for creditor protection safely. It is available to the creditors as a liability mass, so that the share of equity in total capital is of great importance. Consequently, the higher the equity ratio, the lower the creditor risk and vice versa. Since credit institutions worldwide work with relatively little equity and their liabilities are between six and fifteen times their equity (with non-banks this value is usually up to 3 times), the creditors' risks (= risks for investors ) are particularly high here. Equity ratios that are too low induce a high degree of instability in the banking system when high losses occur. Own funds therefore represent the existential bottleneck factor in the banking industry. The banking supervisory authority tries to counter the high credit risk by developing rules for the recognition of equity components and compliance with minimum capital requirements. Legal sources are in particular the EU-wide capital adequacy regulation (English abbreviation CRR) and the German Banking Act (KWG).

The core capital ratio serves the banks themselves as a basis for strategic decisions ( capital increase , restriction or expansion of the loan portfolio and business volume ). In addition, interested to other banks in operation comparison , other creditors , rating agencies , shareholders ( shareholders ) and especially the banking supervision . You have an interest in being able to measure the solvency of an institution at any time. This requires transparency of the economic situation ( annual financial statements ) in order to be able to obtain information about the credit risk from them.

detection

Own funds aggregates

The 2007 financial crisis had also shown that the global banking system lacked high quality equity. That is why the CRR, which has been in force since January 2014, focuses in particular on what is known as “Common Equity Tier 1”, the purest form of equity. The CRR has three clearly defined equity units: common equity (. "Common Equity Tier 1"; Article 25 CRR), additional core capital (. "Additional Tier 1 Capital"; Article 51 CRR) and supplementary capital ( "Tier 2 Capital "; Art. 62 CRR), in which the previous dichotomy was abandoned. The starting point for the calculation is the core capital, which, according to Art. 25 CRR, is made up of “common core capital” and “additional core capital”. The "hard core capital" is, for example, in limited companies from the capital stock ( capital ), the premium of an above par emission and retained earnings . The supplementary capital is becoming less important and may in future only account for 2 percentage points of the total capital requirements. The revaluation reserve still contained therein and the liability surcharge at cooperative banks will be reduced degressively by transitional regulations up to the year 2022 and will then no longer be considered liable equity. The third-tier funds recognized as own funds according to earlier regulations are also no longer considered own funds.

Capital buffer

In addition, the KWG will introduce so-called “capital buffers” from January 2016, which are intended to reduce procyclical effects and must consist of core tier 1 capital. Sections 10c to 10i KWG contain the requirements for five capital buffers as well as regulations on the relationship between the capital buffers and the legal consequences that occur if the requirements are not met:

  • Capital conservation buffer ( "Capital Conservation Buffer"): While provisions and allowances are intended to cover the expected loss, the capital conservation buffer is used to collect unexpected losses ( unexpected loss ). According to Section 10c KWG, a “capital conservation buffer” must be created, which must reach at least 2.5% of the total amount due. If it is fully or partially used for losses incurred , a distribution block - based on the remaining amount of the buffer - applies , which records both profit and dividend distributions and discretionary payments such as bonus payments . The capital conservation buffer partially resolves the so-called regulatory paradox , according to which a higher (minimum) capital cannot be used to cover losses , since falling below the increased minimum requirements would lead to the withdrawal of the banking license . If, on the other hand, the capital conservation buffer is not reached, a distribution block will initially apply as a milder regulatory remedy.
  • In addition, according to § 10d , an existing common equity of KWG countercyclical buffer ( "Capital countercyclical Buffer") to form the total exposure amount in the amount of 0.25%. On the one hand, it is intended to limit the system-wide build-up of credit risks in the upswing phase and, on the other hand, to ensure sufficient credit supply for the economy in the downturn. Its use also leads to the distribution block.
  • Furthermore, by the BaFin a capital buffers for systemic risk to § 10e are set KWG.
  • A capital buffer for global systemically important institutions is to be set up by major banks in accordance with Section 10f of the KWG and for other systemically important institutions in accordance with Section 10g of the KWG if the requirements are met.

What all capital buffers have in common is that they are intended to build up capital buffers that go beyond the minimum capital requirements and can be dissolved in times of economic downturn or stressful situations in order to strengthen the resilience of the institutions. While the capital conservation buffer is uniformly 2.5% for all institutions, each institution has to calculate and apply an institution-specific countercyclical capital buffer rate itself. The countercyclical capital buffer is intended to create additional capital should excessive credit growth contribute to the development of systemic risk. The prerequisite for the application of the capital buffer for systemic risks is that non-cyclical systemic or macroprudential risks can lead to a disruption with significant effects on the national financial system and the real economy and that they have not already been sufficiently reduced or averted by other measures laid down in the Capital Adequacy Directive and the Capital Adequacy Ordinance can be.

Total claim amount

The core capital determined in this way is now compared with the so-called total exposure amount (Art. 92 Paragraph 3 CRR in conjunction with Art. 92 Paragraph 4 b). The total claim amount is calculated as follows:

Risikogewichtetes Kreditrisiko
    + 12,5*(Überschreitungen der Großkreditobergrenzen
    + Fremdwährungsrisiko
    + Abwicklungsrisiko
    + Warenpositionsrisiko
    + Marktrisiko
    + operationelles Risiko)
    + Derivaterisiko
    = Gesamtforderungsbetrag

Determination of the odds

This results in the "hard core capital ratio", "core capital ratio" and "total capital ratio" for the individual equity capital aggregates:

Credit institutions must comply with the following minimum ratios stipulated in Art. 92 (1) CRR from January 2019 - which are to be calculated using these formulas:

  • Common Equity Tier 1 ratio: 4.5%
  • Core capital ratio: 6%
  • Total capital ratio: 8%

each from the total claim amount. For example, if the total amount receivable amounts to 100 million euros, the core capital must reach at least 4.5 million, the core capital at least 6 million and the total capital at least 8 million euros. The to be derived from the financial statements of credit institutions quotas, no less than the minimum rates set out in Article 92, Section 1 of CRR at any time.. The odds measure what proportion of risk-bearing assets must fail, has been completely absorbed by the liable capital of a credit institution and therefore acute risk of insolvency is .

meaning

The banks' own funds are to be strengthened not only quantitatively but also qualitatively, with core core capital being of central importance. The majority of the minimum capital requirements must be represented by hard core capital. The core capital ratio is the most important balance sheet figure that provides information about the vertical capital structure of a credit institution. It serves as a quantitative measure for the endowment of credit institutions with own funds and is a benchmark for banking supervision, for the reputation of an institution, part of the rating of rating agencies and the subject of public discussion. The statutory minimum quotas for the capital aggregates would be ineffective from a regulatory point of view if it was not sanctioned if they were not exceeded . However, banks are threatened with closure if their core capital ratio falls permanently below 4%. This results in the withdrawal of the banking license . The requirement for “adequate own funds” (Section 10 , Section 10a Paragraphs 4 and 8 KWG, Art. 1 CRR), which is often used in law, is to be regarded as fulfilled if at least the statutory minimum capital ratios are achieved. An improvement in the core capital ratio leads to a better rating from the agencies. A good bank rating requires, in particular, a stable business model , a strong equity base , a reduction in refinancing risks and cost savings . It leads to an improvement in refinancing costs and vice versa.

The minimum capital ratios are part of other laws. Institutions are only allowed to take on risk from the financial market stabilization fund according to § 2 and § 4 of the Financial Market Stabilization Fund Ordinance (FMStFV) with a core capital ratio of at least 7% . According to IAS 1.135d, information is required as to whether a group has met all possible external minimum capital requirements. At banks, this is the core capital and the total capital ratio.

The minimum capital ratios will not be introduced immediately, but with the application of staggered transitional provisions in order to allow the necessary latitude for the necessary adjustment processes. The build-up of the new capital is accompanied by the gradual reduction of the old equity components that no longer meet the new recognition criteria. Since January 2015, a hard core capital ratio of 4.5%, plus 1.5% additional core capital plus 2% supplementary capital, i.e. 8% total capital ratio has been in effect. The capital buffers apply from January 2016 (initially 0.625% capital conservation buffer and countercyclical capital buffer each) and grow to 2.5% each by 2019, so that from 2019 a total capital ratio of at least 13% is actually required.

The core capital ratio at banks is not identical to their equity ratio. The latter is calculated as the ratio of recognized equity to total assets and is therefore usually lower than the core capital ratio. Since the equity ratio is irrelevant for regulatory purposes, banks, rating agencies and the general public use the core capital ratio and its other aggregates as a benchmark.

International

The Capital Adequacy Ordinance applies across the EU and must therefore be applied in the states of the European Union . The Swiss supervisory authority FINMA has set a core capital ratio of 10% for UBS and Credit Suisse , as both are classified as systemically relevant . This is known as the "Swiss Finish". In Switzerland, a core capital ratio of 19% is required for major banks until 2018. In Great Britain, banks have been prescribed a rate of 9% since the financial market crisis. If this is not achieved, funds must be drawn from the state rescue package, which also involves a corresponding state participation.

Individual evidence

  1. Horst S. Werner, Equity Financing , 2006, p. 23
  2. a b Philipp Lessenich, Design and significance of the new equity and liquidity rules, 2013, p. 40f.
  3. Deutsche Bundesbank, Guide to the new capital and liquidity rules for banks , August 2011, p. 3
  4. Countercyclical capital buffer. Retrieved November 8, 2019 .
  5. concerning the entire financial system
  6. Torben Mothes, final exams: general banking management, business management, economics, law , 2015, p. 22.
  7. Mario Szkrab, Selected Measures to Solve the Financial Market Crisis, 2010, p. 38.
  8. Dorothea Schäfer / Klaus F. Zimmermann, Bad Bank , in: DIW weekly report 13/2009, p. 198 ff.
  9. G. Dengl, Rating agencies call for higher equity ratios , 2003, o. P.
  10. Letter from the European Commission of December 12, 2008 to the Federal Government K (2008) 2629, State aid regulation No. N 625/2008 - Germany, rescue package for financial institutions in Germany , No. 10
  11. Dieter Weber, Risk Disclosure of Credit Institutions , 2009, p. 162.
  12. Christoph G. Schmutz: Diversity of values ​​makes comparison difficult: equity ratio salad that is difficult to digest. In: Neue Zürcher Zeitung. February 8, 2013, accessed on August 25, 2019 (Swiss Standard German). P. 1.
  13. Stefanie Burgmaier / Stefanie Hüthig, BANKMAGAZIN 12/10 , year 2010, p. 15
  14. Great Britain: Bankruptcy banks face imprisonment in the future. In: Handelsblatt.com. October 1, 2013, accessed January 4, 2017 .