• BANK Division 3.2.B BANK Division 3.2.B Elements of regulatory capital

    • BANK 3.2.7 Regulatory capital

      (1) The regulatory capital of a firm is the sum of its tier 1 capital and tier 2 capital.
      (2) Tier 1 capital is the sum of a firm's CET 1 capital and additional tier 1 capital. Tier 1 capital is also known as going-concern capital because it is meant to absorb losses while the firm is viable.

      Note For the elements of CET 1 capital and additional tier 1 capital — see rules 3.2.8 and 3.2.10.
      (3) Tier 2 capital is the sum of the elements set out in rule 3.2.12. Tier 2 capital is also known as gone-concern capital because it is meant to absorb losses after the firm ceases to be viable.
      (4) For these rules, the 3 categories of regulatory capital are CET 1 capital, additional tier 1 capital and tier 2 capital.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.2.8 Common equity tier 1 capital

      Common equity tier 1 capital (or CET 1 capital) is the sum of the following elements:

      (a) common shares issued by a banking business firm that satisfy the criteria in rule 3.2.9 for classification as common shares (or the equivalent for non-joint stock companies);
      (b) share premium resulting from the issue of instruments included in CET 1 capital;

      Note Share premium is also known as stock surplus and constitutes additional paid-in capital.
      (c) retained earnings;
      (d) accumulated other comprehensive income and other disclosed reserves (for example, the foreign currency translation reserve mentioned in rule 6.2.2 (4));
      (e) common shares, issued by a consolidated subsidiary of the firm and held by third parties, that satisfy the criteria in rule 3.2.16 for inclusion in CET 1 capital;
      (f) regulatory adjustments applied in the calculation of CET 1 capital in accordance with Division 3.2.D.
      Note Retained earnings and other comprehensive income include appropriated profit or loss.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 3.2.9 Criteria for classification as common shares

      (1) An instrument issued by a banking business firm is classified as a common share and included in CET 1 capital if all of the criteria in subrules (2) to (15) are satisfied.
      (2) The instrument is the most subordinated claim in case of the liquidation of the firm.
      (3) The holder of the instrument is entitled to a claim on the residual assets that is proportional to its share of issued capital, after all senior claims have been repaid in liquidation. The claim must be unlimited and variable and must be neither fixed nor capped.
      (4) The principal amount of the instrument is perpetual and never repayable except in liquidation. Discretionary repurchases and other discretionary means of reducing capital allowed by law do not constitute repayment.

      Note Under rule 3.3.6, the Regulatory Authority's approval is required for a reduction in capital.
      (5) The firm does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled. The statutory or contractual terms do not provide anything that might give rise to such an expectation.
      (6) Distributions are paid out of distributable items of the firm (including retained earnings) and the amount of distributions:
      (a) is not tied or linked to the amount paid in at issuance; and
      (b) is not subject to a contractual cap (except to the extent that a firm may not pay distributions that exceed the amount of its distributable items).
      (7) There are no circumstances under which the distributions are obligatory. Non-payment of distributions does not constitute default.
      (8) Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. There are no preferential distributions and in particular none for any other elements classified as the highest quality issued capital.
      (9) It is the issued capital that takes the first and proportionately greatest share of any losses as they occur. Within the highest quality capital, each instrument absorbs losses on a going-concern basis proportionately and equally with all the others.

      Note This criterion is taken to be satisfied even if the instrument includes a permanent write-down mechanism.
      (10) The paid-in amount is recognised as equity capital (rather than as a liability) for determining balance-sheet insolvency.
      (11) The paid-in amount is classified as equity in accordance with the relevant accounting standards.

      Note For the firm's choice and use of accounting standards — see rule 2.1.6.
      (12) The instrument is directly issued and paid-in, and the firm has not directly or indirectly funded the purchase of the instrument.
      (13) The paid-in amount is neither secured nor covered by a guarantee of the firm or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder's claim in relation to the claims of the firm's creditors.
      (14) The instrument is issued only with the approval of the owners of the firm, either given directly by the owners or, if permitted by the applicable law, given by its governing body or by other persons authorised by the owners.
      (15) The instrument is clearly and separately disclosed on the firm's balance sheet.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 3.2.10 Additional tier 1 capital

      Additional tier 1 capital is the sum of the following elements:

      (a) instruments issued by a banking business firm that satisfy the criteria in rule 3.2.11 for inclusion in additional tier 1 capital (and are not included in CET 1 capital);
      (b) share premium resulting from the issue of instruments included in additional tier 1 capital;

      Note Share premium is also known as stock surplus and constitutes additional paid-in capital.
      (c) instruments, issued by consolidated subsidiaries of the firm and held by third parties, that satisfy the criteria in rule 3.2.17 for inclusion in additional tier 1 capital (and are not included in CET 1 capital);
      (d) regulatory adjustments applied in the calculation of additional tier 1 capital in accordance with Division 3.2.D.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.2.11 Criteria for inclusion in additional tier 1 capital

      (1) An instrument is included in additional tier 1 capital if all of the criteria in subrules (2) to (16) are satisfied.
      (2) The instrument is paid-in.
      (3) The instrument is the most subordinated claim after those of depositors, general creditors and holders of the subordinated debt of the firm.
      (4) The paid-in amount is neither secured nor covered by a guarantee of the firm or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder's claim in relation to the claims of the firm's creditors.
      (5) The instrument is perpetual. It has no maturity date and there are no step-ups or other incentives to redeem.
      (6) If the instrument is callable by the firm, it can only be called 5 years or more after the instrument is paid-in and only with the approval of the Regulatory Authority. The firm must not do anything to create an expectation that the exercise of the option will be approved, and, if the exercise is approved, the firm:
      (a) must replace the called instrument with capital of the same or better quality and at conditions sustainable for the income capacity of the firm; or
      (b) must demonstrate to the authority that its capital will exceed the firm's minimum capital requirement after the option is exercised.
      (7) A repayment of principal through repurchase, redemption or other means must be approved by the Regulatory Authority. The firm must not assume, or create a market expectation, that such approval will be given.
      (8) The instrument must provide for the firm to have at all times discretion not to make a distribution or pay a dividend or coupon. The exercise of the discretion must not impose restrictions on the firm (except in relation to distributions to common shareholders) and must not constitute default.
      (9) Dividends and coupons must be paid out of distributable items.
      (10) The instrument must not have a credit-sensitive-dividend feature under which a dividend or coupon is periodically reset based (wholly or partly) on the firm's credit standing.
      (11) The instrument must not contribute to the firm's liabilities exceeding its assets if such a balance-sheet test forms part of any insolvency law applying in the jurisdiction where the instrument was issued.
      (12) An instrument classified as a liability for accounting purposes must have principal loss absorption through conversion to common shares, or a write-down mechanism that allocates losses to the instrument, at a pre-specified trigger point. The conversion must be made in accordance with rule 3.2.14.
      (13) A write-down of the instrument has the following effects:
      (a) reducing the claim of the instrument in liquidation;
      (b) reducing the amount repaid when a call option is exercised;
      (c) reducing or eliminating dividend or coupon payments on the instrument.
      (14) Neither the firm nor a related party over which the firm exercises control has purchased the instrument, nor has the firm directly or indirectly funded the purchase of the instrument.
      (15) The instrument has no features that hinder recapitalisation. For example, it must not require the firm to compensate investors if a new instrument is issued at a lower price during a specified period.
      (16) If the instrument is issued by a special purpose vehicle, the proceeds are immediately available without limitation to the firm through an instrument that satisfies the other criteria for additional tier 1 capital.

      Note For the treatment of instruments issued by a special purpose vehicle — see rule 3.2.19.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 3.2.12 Tier 2 capital

      Tier 2 capital is the sum of the following elements:

      (a) instruments issued by the firm that satisfy the criteria in rule 3.2.13 for inclusion in tier 2 capital (and are not included in tier 1 capital);
      (b) share premium resulting from the issue of instruments included in tier 2 capital;

      Note Share premium is also known as stock surplus and constitutes additional paid-in capital.
      (c) instruments, issued by consolidated subsidiaries of the firm and held by third parties, that satisfy the criteria in rule 3.2.18 for inclusion in tier 2 capital (and are not included in tier 1 capital);
      (d) regulatory adjustments applied in the calculation of tier 2 capital in accordance with Division 3.2.D;
      (e) general provisions or general reserves held against future, presently unidentified losses (but only up to a maximum of 1.25% of risk-weighted assets for credit risk, calculated using the standardised approach in Part 4.3).
      Note General provisions and reserves are freely available to meet losses that subsequently materialise and therefore qualify for inclusion in tier 2 capital. In contrast, provisions for identified deterioration of particular assets or known liabilities, whether individual or grouped, should be excluded because they would not be available to meet losses.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 3.2.13 Criteria for inclusion in tier 2 capital

      (1) An instrument is included in tier 2 capital if all the criteria in subrules (2) to (11) are satisfied.
      (2) The instrument is paid-in.
      (3) The instrument is the most subordinated claim after those of depositors, general creditors and holders of the subordinated debt of the firm.
      (4) The paid-in amount is neither secured nor covered by a guarantee of the firm or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder's claim in relation to the claims of the firm's depositors and general creditors.
      (5) The original maturity of the instrument is at least 5 years.
      (6) The recognition in regulatory capital in the remaining 5 years before maturity is amortised on a straight line basis and there are no step-ups or other incentives to redeem.
      (7) If the instrument is callable by the firm, it can only be called 5 years or more after the instrument is paid-in and only with the approval of the Regulatory Authority. The firm must not do anything to create an expectation that the exercise of the option will be approved, and, if the exercise is approved, the firm:
      (a) must replace the called instrument with capital of the same or better quality and at conditions sustainable for the income capacity of the firm; or
      (b) must demonstrate to the authority that its capital will exceed the firm's minimum capital requirement after the option is exercised.
      (8) The holder has no right to accelerate future scheduled payments of coupon or principal, except in bankruptcy or liquidation.
      (9) The instrument does not have a credit-sensitive-dividend feature under which a dividend or coupon is periodically reset based (wholly or partly) on the firm's credit standing.
      (10) Neither the firm nor a related party over which the firm exercises control has purchased the instrument, nor has the firm directly or indirectly funded the purchase of the instrument.
      (11) If the instrument is issued by a special purpose vehicle, the proceeds are immediately available without limitation to the firm through an instrument that satisfies the other criteria for tier 2 capital.

      Note For the treatment of instruments issued by a special purpose vehicle — see rule 3.2.19.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 3.2.14 BANK 3.2.14 Requirements — loss absorption at point of non-viability

      (1) This rule applies to an additional tier 1 or tier 2 instrument issued by a banking business firm. It sets out additional requirements to ensure loss absorption at the point of non-viability.
      (2) The terms and conditions of an instrument must give the Regulatory Authority the discretion to direct that the instrument be written-off or converted to common equity on the happening of a trigger event.
      (3) The firm must be able to issue the required number of shares specified in the instrument if a trigger event happens. The issuance of any new shares because of a trigger event must happen before any public sector injection of capital so that capital provided by the public sector is not diluted.
      (4) Trigger event, in relation to the firm that issued the instrument, is the earliest of:
      (a) a decision of the Regulatory Authority that a write-off (without which the firm would become non-viable) is necessary; and
      (b) a decision by the relevant authority in Qatar to make a public sector injection of capital, or give equivalent support (without which injection or support the firm would become non-viable, as determined by that authority).
      (5) If the firm is a member of a financial group and the firm wishes the instrument to be included in the group’s capital in addition to its solo capital, the trigger event must be the earliest of:
      (a) the decision in subrule (4) (a);
      (b) the decision in subrule (4) (b);
      (c) a decision, by the relevant authority in the firm’s home jurisdiction, that a write-off (without which the firm would become non-viable) is necessary; and
      (d) a decision, by the relevant authority in the jurisdiction of the financial regulator that regulates the parent entity of the firm, to make a public sector injection of capital, or give equivalent support, in that jurisdiction (without which injection or support the firm would become non-viable, as determined by that authority).
      (6) Any compensation paid to the holder of an instrument because of a write-off must be paid immediately in the form of common shares (or the equivalent for non-joint-stock companies).
      (7) If the firm is a member of a financial group, any common shares paid as compensation to the holder of the instrument must be common shares of the firm or of the parent entity of the group.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 3.2.14 Guidance

        Conversion or write-off under this rule would be limited to the extent necessary to enable the Regulatory Authority to conclude that the firm is viable without further conversion or write-off.

        Derived from QFCRA RM/2014-2 (as from 1st January 2015).