The Pfandbrief 2011 | 2012

The The significance of common equity Tier 1 capital will be enhanced by another element of
Basel III: under current regulations, common equity Tier 1 capital must make up 50% of total
core capital, which in turn must be at least as high as the supplementary capital. In terms of
credit risk, this means that currently the minimum ratio is 2% of risk-weighted assets for common
equity Tier 1 capital and 4% for total core capital. While the regulatory minimum capital
requirement to back counterparty default risks under Basel III is still 8% of the risk-weighted
assets, the new rules require at least 4.5% of the risk-weighted assets to be backed with common
equity Tier 1 capital and at least 6% with Tier 1 capital. The substantial tightening of
Tier 1 capital ratio requirements will be phased in gradually, from the beginning of 2013 to the
beginning of 2015.
Introduction of additional capital buffers
In future, the regulatory minimum capital requirement will be supplemented by the introduction
of two new regulatory capital buffers, primarily designed to reduce the procyclical effects
of the current Basel capital regime, which proved to be problematic during the financial crisis.
On the one hand, banks will be required to build up a capital reserve, the so-called capital
conservation buffer, above and beyond the regulatory minimum capital requirement during
good times to absorb losses during bad times without violating the regulatory minimum capital
requirements. If they are in danger of such a violation, banks must reduce lending and/
or undertake emergency sales of assets; this “procyclicality” can further exacerbate the crisis
situation. The capital conservation buffer must be comprised exclusively of common equity
Tier 1 capital and will gradually be increased to 2.5% of risk-weighted assets between January
2016 and January 2019. If the capital contribution buffer falls below 2.5%, the bank will
be subject to distribution constraints; the more the reserved capital buffer deviates from 2.5%,
the greater the constraints.
Unlike the capital conservation buffer, affected banks will not be required to maintain the
proposed additional countercyclical capital buffer on a permanent basis, but rather only during
periods of excessive aggregate credit growth. This is designed by regulators to intentionally
dampen credit growth and to build up additional capital reserves for the downturns that often
follow cyclical booms. Identification of excessive credit growth and the determination of the
exact amount of the countercyclical capital buffer to be held will be left to national governments.
The Basel rules propose a maximum buffer of 2.5% of risk-weighted assets. Banks with
international operations should use the weighted average of the national requirements in the
individual countries where its credit exposures are domiciled as their countercyclical capital
buffer. The countercyclical capital buffer must also consist exclusively of common equity Tier 1
capital. If the required level is not held, distribution constraints shall apply.
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Higher capital charges for certain risk positions
While the minimum capital requirement under the Basel III regulations described above
remains at 8% of risk-weighted assets (with the exception of the two new capital buffers to be
introduced) and will “only” induce a shift towards higher-quality capital components, the rules
also include requirements that will entail increases in the capital charges for risk-weighted
assets relative to the status quo for certain categories of risk positions.