Regulation II

Question 1

Basel IV
* Changes agreed in 2016 and 2017
* Regulators: Changes completing Basel III.
* Industry: …
* Effect from January 2022
* British banks to raise another £50Bn in capital to meet Basel IV
* Average Common Equity Tier 1 (CET1) ratio for European banks is to fall by 0.9.

Answer 1

Significant increase in capital and new round of reforms.

Question 2

Basel IV
* Limits …(IRB approach). Similar rationale as the leverage ratio requirement,
* Standardized floor: …
* Suppose bank has assets of 100.
* Risk weight from SA=100%. Risk-weight from IRB: 50%.
* Basel III: From SA, RWA=100. If the bank uses IRB, RWA=50.
* Basel IV: Even if the bank uses IRB,…

Answer 2

reduction in capital from banks’ use of internal models

Capital requirement will always be at least 72.5% of the requirement under the Standardized approach.

RWA = 72.5% x 100 = 72.5.

Question 3

Globally systemically important banks
* Additional …
* Additional Common Equity Tier 1 capital requirement ranging from 1%-3.5% depending on the systemic important of the bank measured by:
…5 factors

Answer 3

capital requirements for G-SIBs.

• Cross-border activity
• Size
• Interconnectedness
• Substitutability
• Complexity

Question 4

Countercyclical capital buffers
* Discretion for the …
* Counter-cyclical buffer between …
* Used before for example in Spain.
* Build …
– Easier to raise capital levels in good times
* Prevent …

Answer 4

individual country for how much and when to implement the buffer.

0-2.5% above the minimum regulatory capital requirement.

capital buffers during good times for stress periods.

excessive credit expansion.

Question 5

Loss Absorbency Capacity/ CoCos
* EU: …
* Resolution in Cyprus should work as …
* Debt that is …
* Contingent Convertible Bonds (CoCos).
* Increase … during stress periods.

Answer 5

Debt holders should suffer losses as well.

a blue print in the future.

converted into equity during stress periods.

bank’s loss absorbance capacity

Question 6

Contingent Convertible Bonds (CoCos)
* Push for …
* During stress periods, what you need is …
* CoCos are hybrid instruments that are designed to achieve that. How does it work?

Answer 6

increasing Total Loss Absorbency Capacity (TLAC)

less debt, more equity.

• Debt instrument in normal times
• Converts into equity (or written down) during stress periods.

Question 7

CoCo and loss absorbency
CoCo can boost equity in one of two ways:
* …
* Principal writedown: …
* Full or partial writedown
* Most PWD CoCos have …
* CoCo bond issued by Rabobank in March 2010: example?

Answer 7

Conversion into equity: Increases CET1 by converting into equity at a pre-defined conversion rate.
Writing down debt increasing capital.

a full writedown feature.

Holders would lose 75% of the face value and receive the remaining 25% in cash.

Question 8

Main design features of CoCos

Answer 8

Trigger: mechanical and/or discretionary

Loss absorption mechanism: conversion to equity or principal writedown

Question 9

Basel III and CoCos

Answer 9

slide 39