• BANK Division 3.2.D BANK Division 3.2.D Regulatory adjustments

    • BANK Subdivision 3.2.D.1 BANK Subdivision 3.2.D.1 General

      • BANK 3.2.20 Introduction

        (1) Regulatory adjustments to a banking business firm’s capital may be required to avoid double-counting, or artificial inflation, of its capital. They may also be required in relation to assets that cannot readily be converted into cash.
        (2) Adjustments can be made to all 3 categories of regulatory capital, but most of them are to CET 1 capital.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 3.2.21 Approaches to valuation and adjustment

        (1) A banking business firm must use the same approach for valuing regulatory adjustments to its capital as it does for balance-sheet valuations. An item that is deducted from capital must be valued in the same way as it would be for inclusion in the firm’s balance sheet.
        (2) The firm must use the corresponding deduction approach and the threshold deduction rule in making adjustments to its capital.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 3.2.22 Definitions for Division 3.2.D

        In this Division:

        entity concerned means any of the following entities:

        (a) a banking business firm;
        (b) any other financial or insurance entity;
        (c) an entity over which a banking business firm exercises control.
        Note Exercise control is defined in the glossary.

        significant investment, by a banking business firm in an entity concerned, means an investment of 10% or more in the common shares, or other instruments that qualify as capital, of the entity concerned. Investment includes a direct, indirect and synthetic holding of capital instruments.

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

    • BANK Subdivision 3.2.D.2 BANK Subdivision 3.2.D.2 Adjustments to common equity tier 1 capital

      • BANK 3.2.23 Form of adjustments

        Adjustments to CET 1 capital must be made in accordance with this Subdivision. Regulatory adjustments are generally in the form of deductions, but they may also be in the form of recognition or derecognition of items in the calculation of a firm’s capital.

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

      • BANK 3.2.24 Goodwill and intangible assets

        A banking business firm must deduct from CET 1 capital the amount of its goodwill and other intangible assets (except mortgage servicing rights). The amount must be net of any related deferred tax liability that would be extinguished if the goodwill or assets become impaired or derecognised under IFRS or any other relevant accounting standards.

        Note For the treatment of mortgage servicing rights — see rule 3.2.41 (Deductions from common equity tier 1 capital).

        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 3.2.25 Deferred tax assets

        (1) A banking business firm must deduct from CET 1 capital the amount of deferred tax assets (except those that relate to temporary differences) that depend on the future profitability of the firm.
        (2) A deferred tax asset may be netted with a deferred tax liability only if the asset and liability relate to taxes levied by the same taxation authority and offsetting is explicitly permitted by that authority. A deferred tax liability must not be used for netting if it has al been netted against a deduction of goodwill, other intangible assets or defined benefit pension assets.

        Note Any deferred tax liability that may be netted must be allocated pro rata between deferred tax assets under this rule and those under the threshold deduction rule. For the treatment of deferred tax assets that relate to temporary differences (for example, allowance for credit losses) — see rule 3.2.41 (Deductions from common equity tier 1 capital).
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 3.2.26 Cash flow hedge reserve

        In the calculation of CET 1 capital, a banking business firm must derecognise the amount of the cash flow hedge reserve that relates to the hedging of items that are not fair valued on the balance sheet (including projected cash flows).

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

      • BANK 3.2.27 Cumulative gains and losses from changes to own credit risk

        In the calculation of CET 1 capital, a banking business firm must derecognise all unrealised gains and unrealised losses that have resulted from changes in the fair value of liabilities that are due to changes in the firm’s own credit risk.

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

      • BANK 3.2.28 Defined benefit pension fund assets

        (1) A banking business firm must deduct from CET 1 capital the amount of a defined benefit pension fund that is an asset on the firm’s balance sheet. The amount must be net of any related deferred tax liability that would be extinguished if the asset becomes impaired or derecognised under IFRS or any other relevant accounting standards.
        (2) The firm may apply to the Regulatory Authority for approval to offset from the deduction any asset in the defined benefit pension fund to which the firm has unrestricted and unfettered access. Such an asset must be assigned the risk-weight that would be assigned if it were owned directly by the firm.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 3.2.29 Securitisation gains on sale

        In the calculation of CET 1 capital, a banking business firm must derecognise any increase in equity capital or CET 1 capital from a securitisation or resecuritisation transaction (for example, an increase associated with expected future margin income resulting in a gain-on-sale).

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

      • BANK 3.2.30 Higher capital imposed on overseas branch

        (1) If a banking business firm has an overseas branch, the firm must deduct from CET 1 capital whichever is the higher of any capital requirement imposed by the Regulatory Authority or the financial regulator in the jurisdiction in which the branch is located.
        (2) This rule does not apply if the overseas branch is a consolidated entity of the banking business firm. A branch is a consolidated entity if it is included in the firm’s consolidated returns.
        (3) Despite subrule (2), if the financial regulator in the jurisdiction in which a branch is located imposes a capital requirement for the foreign branch, a banking firm must deduct from CET 1 capital the amount of any shortfall between the actual capital held by the foreign branch and that capital requirement.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 3.2.31 Assets lodged or pledged to secure liabilities

        (1) A banking business firm must deduct from CET 1 capital the amount of any assets lodged or pledged by the firm if:
        (a) the assets were lodged or pledged to secure liabilities incurred by the firm; and
        (b) the assets are not available to meet the liabilities of the firm.
        (2) The Regulatory Authority may determine that, in the circumstances, the amount of assets lodged or pledged need not be deducted from the firm’s CET 1 capital. The determination must be in writing.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 3.2.32 Acknowledgments of debt

        (1) A banking business firm must deduct from CET 1 capital the net present value of an acknowledgement of debt outstanding issued by it to directly or indirectly fund instruments that qualify as CET 1 capital.
        (2) This rule does not apply if the acknowledgement is subordinated in rank similar to that of instruments that qualify as CET 1 capital.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 3.2.33 Accumulated losses

        A banking business firm must deduct from CET 1 capital the amount of any accumulated losses.

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

    • BANK Subdivision 3.2.D.3 BANK Subdivision 3.2.D.3 Deductions from categories of regulatory capital

      • BANK 3.2.34 Deductions using corresponding deduction approach

        (1) The deductions that must be made from CET 1 capital, additional tier 1 capital or tier 2 capital under the corresponding deduction approach are set out in this Subdivision. A banking business firm must examine its holdings of index securities and any underlying holdings of capital to determine whether any deductions are required as a result of such indirect holdings.
        (2) Deductions must be made from the same category for which the capital would qualify if it were issued by the banking business firm itself or, if there is not enough capital at that category, from the next higher category.

        Example

        If the amount of tier 2 capital is insufficient to cover the amount of deductions from that category, the shortfall must be deducted from additional tier 1 capital and, if additional tier 1 capital is still insufficient, the remaining amount must be deducted from CET 1 capital.
        (3) The corresponding deduction approach applies regardless of whether the positions or exposures are held in the banking book or trading book.
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 3.2.35 Investments in own shares and capital instruments

        (1) A banking business firm must deduct direct or indirect investments in its own common shares or own capital instruments (except those that have been derecognised under IFRS or any other relevant accounting standards). The firm must also deduct any of its own common shares or instruments that it is contractually obliged to purchase.
        (2) The gross long positions may be deducted net of short positions in the same underlying exposure only if the short positions involve no counterparty risk. However, gross long positions in its own shares resulting from holdings of index securities may be netted against short positions in its own shares resulting from short positions in the same underlying index, even if those short positions involve counterparty risk.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 3.2.36 Reciprocal cross holdings

        A banking business firm must deduct reciprocal cross holdings in shares, or other instruments that qualify as capital, of an entity concerned.

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

      • BANK 3.2.37 Non-significant investments — aggregate is less than 10% of firm's common equity tier 1 capital

        (1) This rule applies if:
        (a) a banking business firm makes a non-significant investment in an entity concerned;
        (b) the entity concerned is an unconsolidated entity (that is, the entity is not one that is included in the firm's consolidated returns);
        (c) the firm does not own 10% or more of the common shares of the entity concerned; and
        (d) after applying all other regulatory adjustments, the total of the deductions required to be made under this rule is less than 10% of the firm's CET 1 capital.
        (2) A banking business firm must deduct any investments in common shares, or other instruments that qualify as capital, of an entity concerned.
        (3) The amount to be deducted is the net long position (that is, the gross long position net of short positions in the same underlying exposure if the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least 1 year).
        (4) Underwriting positions held for more than 5 business days must also be deducted.
        (5) If a capital instrument is required to be deducted and it is not possible to determine whether it should be deducted from CET 1 capital, additional tier 1 capital or tier 2 capital, the deduction must be made from CET 1 capital.
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 3.2.38 Non-significant investments — aggregate is 10% or more of firm's common equity tier 1 capital

        (1) This rule applies if, after applying all other regulatory adjustments, the total of the deductions required to be made under rule 3.2.37 is 10% or more of the firm's CET 1 capital.
        (2) A banking business firm must deduct the amount by which the total of the deductions required to be made under rule 3.2.37 exceeds 10% of the firm's CET 1 capital. This amount to be deducted is referred to as the excess.
        (3) How much of the excess gets to be deducted from each category of regulatory capital under the corresponding deduction approach is calculated in accordance with the following formula:



        A is the amount of CET 1 capital, additional tier 1 capital or tier 2 capital of the banking business firm, as the case requires.

        B is the total capital holdings of the firm.
        Amended by QFCRA RM/2015-1 (as from 1st July 2015).

      • BANK 3.2.39 Significant investments

        (1) This rule applies if:
        (a) a banking business firm makes a significant investment in an entity concerned;
        (b) the entity concerned is an unconsolidated entity (that is, the entity is not one that is included in the firm's consolidated returns); and
        (c) the firm owns 10% or more of the common shares of the entity concerned.
        (2) A banking business firm must deduct the total amount of investments in the entity concerned (other than investments in common shares, or other instruments that qualify as CET 1 capital, of the entity).

        Note For the treatment of investments in common shares, or other instruments that qualify as CET 1 capital, of an entity concerned, see rule 3.2.41 (Deductions from common equity tier 1 capital).
        (3) The amount to be deducted is the net long position (that is, the gross long position net of short positions in the same underlying exposure if the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least 1 year).
        (4) Underwriting positions held for more than 5 business days must also be deducted.
        (5) If a capital instrument is required to be deducted and it is not possible to determine whether it should be deducted from CET 1 capital, additional tier 1 capital or tier 2 capital, the deduction must be made from CET 1 captial.
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 3.2.40 Firms may use estimates or exclude deductions

        (1) If it is impractical for a banking business firm to examine and monitor the firm's exposures to the capital of entities concerned (including through holdings of indexed securities), the firm may apply to the Regulatory Authority for approval to use an estimate of such exposures. The authority will grant such an approval only after the firm satisfies the authority that the estimate is conservative, well-founded and reasonable.
        (2) A banking business firm may also apply to the Regulatory Authority for approval not to deduct an investment made to resolve, or provide financial assistance to reorganise, a distressed entity.
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK Subdivision 3.2.D.4 BANK Subdivision 3.2.D.4 Threshold deduction rule

      • BANK 3.2.41 Deductions from common equity tier 1 capital

        (1) In addition to the other deductions to CET 1 capital under this Chapter, deductions may be required to CET 1 capital under the threshold deduction rule.
        (2) The threshold deduction rule provides recognition for particular assets that are considered to have some limited capacity to absorb losses. The following items come within the threshold deduction rule:
        (a) significant investments in the common shares, or other instruments that qualify as CET 1 capital, of an unconsolidated entity concerned;
        (b) mortgage servicing rights;
        (c) deferred tax assets that relate to temporary differences (for example, allowance for credit losses).
        (3) Instead of full deduction, the items that come within the threshold deduction rule receive limited recognition when calculating CET 1 capital. The total of each of the items in subrule (2) do not require adjustment from CET 1 capital and are risk-weighted at 300% (for items listed on a recognised exchange) or 400% (for items not so listed) provided that:
        (a) each item is no more than 10% of the firm's CET 1 capital (net of all regulatory adjustments except those under this Subdivision); or
        (b) in total, the 3 items are no more than 15% of the firm's CET 1 capital (net of all regulatory adjustments except those under this Subdivision).
        (4) A banking business firm must deduct from CET 1 capital any amount in excess of the threshold in subrule (3)(a) or (b).
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).