The Pfandbrief 2011 | 2012

Effects of Basel III on the Pfandbrief-based lending business
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The new Basel rules recognise three categories of capital: common equity Tier 1 capital,
additional Tier 1 capital and supplementary (Tier 2) capital. Each of these three categories is
defined using a list of qualifying criteria (each of which must be met). Tier 3 capital has been
completely eliminated by Basel III.
On the one hand, the quality of regulatory capital will be enhanced by the fact that these
qualifying criteria are significantly more restrictive than before, especially with respect to
which hybrid equity instruments can be counted toward a bank’s regulatory capital. The initial
restrictions have already been implemented by the recent amendment to the German Banking
Act (KWG) effective 31 December 2010, which transposed the EU’s CRD II amending directive
into law. Basel III will lead to additional limitations. Under Basel III, only hybrid instruments
with no maturity date and no incentives to redeem will continue to be considered as regulatory
core capital. Most of the components that can no longer be counted as core capital under
Basel III will be phased out over a 10-year period beginning in 2013. However, this period
will have to be reconciled with the significantly longer transition periods provided for with the
implementation of CRD II. In a departure from the general qualifying criteria that are independent
of legal form, the Basel Committee proposes that a joint-stock company’s common equity
Tier 1 capital should include only paid-in capital and retained earnings – but there are signs
that this highly disputed Basel III restriction will not be adopted into European Union law.
On the other hand, deductions used to determine regulatory capital will also be redefined,
primarily with the goal of harmonising them internationally. In addition, in future they will be
deductible only from common equity Tier 1 capital, not half from core capital and half from
supplementary capital, as allowed previously in some cases. With respect to the structure of
the regulatory capital, this will lead to an increase in the significance of common equity Tier 1
capital, which is viewed as particularly high quality, thanks to its distinct loss-absorbing
capacity. Basel III proposes a gradual adjustment to the new deduction requirements, from
the beginning of 2014 until the beginning of 2018.
Common equity Tier 1 capital
Specific criteria
e.g., shares, retained earnings, capital
contributions by dormant partners, cooperative
society shares
Other Tier 1 capital
Specific criteria
Deductions
including goodwill, deferred taxes,
share buybacks
Tier 1 capital
Supplementary (Tier 2) capital
Specific criteria
Tier 3 capital