• BANK Part 3.3 BANK Part 3.3 Capital buffers and other requirements

    • BANK 3.3.1 Introduction

      (1) The capital adequacy framework contains 2 additional measures for conserving capital through the capital conservation buffer and the counter-cyclical capital buffer.
      (2) The capital conservation buffer promotes the conservation of capital and the build-up of a buffer above the minimum in times of economic growth and credit expansion, so that the buffer can be drawn down in periods of stress. It imposes an obligation to restrict a firm's distributions when capital falls below the capital conservation buffer minimum.
      (3) The counter-cyclical capital buffer is a macroprudential tool that can be used to mitigate the build-up of a system-wide risk such as excess aggregate credit growth. It is intended to ensure that the banking system has a buffer of capital to protect it against future potential losses.
      (4) These 2 buffers and other requirements on capital are set out in this Part.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 3.3.2 Capital conservation buffer

      (1) A banking business firm whose risk-based capital requirement is higher than its base capital requirement must maintain a minimum capital conservation buffer of:
      (a) 2.5% of the firm's total risk-weighted assets; or
      (b) a higher amount that the Regulatory Authority may, by written notice, set from time to time.
      (2) A firm's capital conservation buffer must be made up of CET 1 capital above the amounts used to meet the firm's CET 1 capital ratio, tier 1 capital ratio and regulatory capital ratio in rule 3.2.6(2).
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.3.3 Capital conservation ratios

      (1) If a banking business firm's capital conservation buffer falls below the required minimum, the firm must immediately conserve its capital by restricting its distributions.

      Note A payment made by a firm that does not reduce its CET 1 capital is not a distribution for the purposes of this Part. Distributions include, for example, dividends, share buybacks and discretionary bonus payments.
      (2) This rule sets out, in column 3 of table 3.3.3, the minimum capital conservation ratios for banking business firms that are required to maintain a capital conservation buffer. Capital conservation ratio is the percentage of earnings that a firm must not distribute if its CET 1 capital ratio falls within the corresponding ratio in column 2 of that table.
      (3) Earnings means distributable profits calculated before deducting elements subject to the restrictions on distributions. Earnings must be calculated after notionally deducting the tax that would have been payable had none of the distributable items been paid.

      Note The effect of calculating earnings after tax is that the tax consequence of the distribution is reversed out.
      (4) A banking business firm must have adequate systems and controls to ensure that the amount of distributable profits and maximum distributable amount are calculated accurately. The firm must be able to demonstrate that accuracy if directed by the Regulatory Authority.
      (5) If the firm is a member of a financial group, the capital conservation buffer applies at group level.

      Table 3.3.3 Minimum capital conservation ratios

      column 1 item column 2 CET1 capital ratio column 3 minimum capital conservation ratio (% of earnings)
      1 4.5% to 5.125% 100
      2 > 5.125% to 5.75% 80
      3 > 5.75% to 6.375% 60
      4 > 6.375% to 7.0% 40
      5 >7% 0

      Examples of application of table

      Assume that a firm's minimum CET 1 capital ratio is 4.5% and an additional 2.5% capital conservation buffer (which must be made up of CET 1 capital) is required for a total of 7% CET 1 capital ratio. Based on table 3.3.3:

      1 If a firm's CET 1 capital ratio is 4.5% or more but less than 5.125%, the firm needs to conserve 100% of its earnings.
      2 If a firm's CET 1 capital ratio is 5.125% or more but less than 5.75%, the firm needs to conserve 80% of its earnings and must not distribute more than 20% of those earnings by way of dividends, share buybacks and discretionary bonus payments.
      3 A firm with a CET 1 capital ratio of more than 7% can distribute 100% of its earnings.
      Amended by QFCRA RM/2018-1 (as from 1st May 2018).

    • BANK 3.3.4 Powers of Regulatory Authority

      (1) The Regulatory Authority may impose a restriction on capital distributions by a firm even if the amount of the firm’s CET 1 capital is greater than its CET 1 capital ratio and required capital conservation buffer.
      (2) The Regulatory Authority may, by written notice, impose a limit on the period during which a banking business firm may operate within a specified capital conservation ratio.
      (3) A banking business firm may apply to the Regulatory Authority to make a distribution in excess of a limit imposed by this Part. The authority will grant approval only if it is satisfied that the firm has appropriate measures to raise capital equal to, or greater than, the amount the firm wishes to distribute above the limit.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.3.5 Counter-cyclical capital buffer

      (1) If imposed by the Regulatory Authority, the counter-cyclical capital buffer would require a firm to have additional CET 1 capital against possible future losses from system-wide risks such as excess credit growth.
      (2) The Regulatory Authority may, by written notice, require banking business firms to have additional CET 1 capital as a counter-cyclical capital buffer. The buffer set by the authority will not exceed 2.5% of total risk-weighted assets.
      (3) The Regulatory Authority will notify banking business firms of any decision to set, or increase, a counter-cyclical capital buffer within a reasonable period of not more than 1 year before the date when the decision takes effect. However, a decision to remove or decrease a counter-cyclical capital buffer will take effect immediately.
      (4) If a counter-cyclical capital buffer applies to a firm, the capital conservation ratios (and capital distribution restrictions) in rule 3.3.3 apply to the firm as if its minimum capital conservation buffer were increased by the amount of the counter-cyclical capital buffer.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 3.3.6 Capital reductions

      (1) A banking business firm must not reduce its capital and reserves without the Regulatory Authority's written approval.

      Examples of ways to reduce capital
      •   a share buyback or the redemption, repurchase or repayment of capital instruments issued by the firm
      •   trading in the firm's own shares or capital instruments outside an arrangement agreed with the authority
      •   a special dividend.
      (2) A banking business firm planning a reduction must prepare a forecast (for at least 2 years) showing its projected capital after the reduction. The firm must satisfy the authority that the firm's capital will still comply with these rules after the reduction.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 3.3.7 Authority can require other matters

      Despite anything in these rules, the Regulatory Authority may require a banking business firm to have capital resources, comply with any other capital requirement or use a different approach to, or method for, capital management. The authority may also require a firm to carry out stress-testing at any time.

      Note Under FSR, article 16, the Regulatory Authority may modify or waive the application of a prudential requirement to an authorised firm or firms.

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