/basel-capital

name: basel-capital
description: >
  Activate for: CET1, Tier 1, Total Capital, capital ratio, RWA, risk-weighted
  assets, Basel III, Basel IV, capital adequacy, capital buffers, MDA, maximum
  distributable amount, leverage ratio, ICAAP, output floor, Pillar 2, CCB,
  CCyB, G-SIB, D-SIB, capital conservation buffer.
  NOT for: credit risk RWA calculation detail (use basel-rwa-credit), market risk
  FRTB capital (use basel-rwa-market), liquidity ratios LCR/NSFR (use liquidity-lcr
  / liquidity-nsfr).
metadata:
  version: "1.0"
  author: "Panaversity — The AI Agent Factory"
  standard: "Basel III (BCBS) — jurisdiction implementations vary (load overlay)"

CAPITAL COMPONENTS

CET1 (Common Equity Tier 1)

CET1 = Ordinary share capital

• Share premium account
• Retained earnings
• Accumulated other comprehensive income (AOCI)
• Goodwill and other intangible assets (net of deferred tax)
• Deferred tax assets dependent on future profitability
• Significant investments in financial institutions (>10% threshold)
• Excess of regulatory expected loss over IFRS provisions (IRB banks)
• Other regulatory deductions (jurisdiction-specific — load overlay)

Additional Tier 1 (AT1)

Perpetual instruments with mandatory loss absorption. Must be: perpetual; fully discretionary distributions; absorb losses on going concern. Contingent convertibles (CoCos) / write-down instruments qualifying as AT1. AT1 coupons subject to MDA restrictions if CET1 in combined buffer requirement zone.

AT1 Trigger Mechanics

CoCo bonds have contractual triggers for conversion or write-down:

• Low trigger: 5.125% CET1 ratio — instrument converts to equity or writes down
• High trigger: 7.0% CET1 ratio — required by some regulators (PRA for UK G-SIBs)

When triggered: AT1 converts to ordinary shares (diluting existing shareholders) or writes down to zero (permanent or temporary, per instrument terms). The conversion ratio determines how many shares the AT1 holder receives. Post-conversion: CET1 increases by the amount of AT1 converted; AT1 decreases. This mechanism is critical in stress testing — approaching trigger levels can itself accelerate market panic and deposit outflows.

Tier 2

Subordinated debt: minimum 5-year original maturity, amortised in final 5 years. Eligible IFRS provisions: excess of IFRS provisions over IRB expected loss, capped at 0.6% of credit RWA. General loan-loss reserves (SA banks): up to 1.25% of credit RWA.

CAPITAL RATIO CALCULATIONS

CET1 Ratio = CET1 Capital / Total RWA Tier 1 Ratio = (CET1 + AT1) / Total RWA Total Capital Ratio = (CET1 + AT1 + T2) / Total RWA Leverage Ratio = Tier 1 Capital / Total Exposure Measure

RISK-WEIGHTED ASSETS COMPONENTS

Total RWA = Credit RWA + Market RWA + Operational RWA + CVA RWA See products/basel-rwa-credit.md for credit RWA calculation.

MINIMUM REQUIREMENTS (BASEL III GLOBAL STANDARDS)

CET1: 4.5% | Tier 1: 6.0% | Total Capital: 8.0% | Leverage: 3.0% Load jurisdiction overlay for local minimums (UK, EU, US, APRA, MAS all differ).

CAPITAL BUFFERS (add to minimums above)

Capital Conservation Buffer (CCB): 2.5% (all banks, all jurisdictions) Countercyclical Capital Buffer (CCyB): 0.0%-2.5% (set by national authority) CCyB is RELEASED in a downturn — always check current rate for the jurisdiction G-SIB surcharge: 1.0%-3.5% (global systemically important banks, FSOC/FSB list) D-SIB / O-SII surcharge: 0.0%-3.0% (domestic systemically important banks) Systemic Risk Buffer (SyRB): varies by jurisdiction (EU/UK only)

Buffer Stacking — Effective CET1 Requirement

Buffers stack on top of the CET1 minimum. Example for a UK G-SIB:

| Component | Rate | Cumulative | |---|---|---| | CET1 hard minimum | 4.5% | 4.5% | | + CCB | 2.5% | 7.0% | | + CCyB (UK current rate — check BoE) | 2.0% | 9.0% | | + G-SIB surcharge | 1.5% | 10.5% | | + Systemic Risk Buffer (if applicable) | 1.0% | 11.5% | | + Pillar 2A (bank-specific, confidential) | ~1.5% | ~13.0% | | + Management buffer (internal) | ~1.5% | ~14.5% |

The effective CET1 a large UK bank targets is therefore ~14-15%, well above the 4.5% Basel III minimum. Breaching ANY buffer layer triggers restrictions.

MAXIMUM DISTRIBUTABLE AMOUNT (MDA)

MDA restrictions apply when CET1 falls INTO the combined buffer requirement (i.e., below [4.5% + CCB + CCyB + surcharge] but above the 4.5% hard minimum).

| % of Combined Buffer Remaining | Max % of Profits Distributable | |---|---| | 0-25% | 0% | | 25-50% | 20% | | 50-75% | 40% | | 75-100% | 60% | | Above 100% (fully met) | No restriction |

MDA restrictions apply to: ordinary dividends, AT1 coupon payments, discretionary staff variable remuneration above regulatory threshold.

BASEL IV OUTPUT FLOOR

IRB-calculated credit RWA must be >= 72.5% of SA RWA for the same portfolio. If IRB RWA < 72.5% x SA RWA -> use SA RWA x 72.5% as the binding RWA. Phase-in: gradual from 2025 to full implementation 2030 (varies by jurisdiction). This is the most consequential Basel IV change for large IRB banks.

LEVERAGE RATIO DETAIL

Total Exposure Measure = On-balance-sheet assets (net of eligible credit risk mitigation)

• Derivative exposures (at replacement cost + potential future exposure)
• Securities financing transaction exposures
• Off-balance-sheet items (x 100% CCF, or 10% for unconditionally cancellable)

Note: Leverage ratio can be the BINDING capital constraint for banks holding large pools of low-risk assets (government bonds, central bank reserves at 0% RW but full leverage exposure). This often drives the treasury/balance sheet strategy.

OUTPUT FORMAT — CAPITAL ADEQUACY REPORT

CAPITAL ADEQUACY REPORT
Entity:             [Bank / Group name]
Reporting Date:     [YYYY-MM-DD]
Jurisdiction:       [UK PRA / EU CRR / US Fed / etc.]

CAPITAL COMPONENTS (M):
  CET1 Capital:                    [Amount]
  AT1 Capital:                     [Amount]
  Tier 1 Capital: