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).