4.13. Total Capital

(1) The Total Capital of a Bank is the sum of its Tier 1 (T1) Capital and Tier 2 (T2) Capital.

(2) T1 Capital is the sum of a Bank’s Common Equity Tier 1 (CET 1) Capital and Additional Tier 1

(AT1) Capital. T1 Capital is also known as going-concern capital because it is meant to absorb losses while the Bank is viable.

(3) T2 Capital is defined in Rule 4.18. T2 Capital is also known as gone-concern capital because it is meant to absorb losses after the Bank ceases to be viable.

(4) For these rules, the 3 categories of Regulatory Capital are CET 1 Capital, AT1 Capital and T2 Capital.

4.14. Common Equity Tier 1 (CET1) Capital

CET 1 Capital is the sum of the following elements:

1. (a) common shares issued by the Bank that satisfy the criteria in Rule 4.15 for classification as common shares for regulatory purpose (or the equivalent for legal entities which are not);
2. (b) share premium resulting from the issue of instruments included in CET 1 Capital;
3. (c) retained earnings;
4. (d) accumulated other comprehensive income and other disclosed reserves;
5. (e) common shares, issued by a consolidated Subsidiary of the Bank and held by third parties, that satisfy the criteria in Rule 4.22 for inclusion in CET 1 Capital;
6. (f) regulatory adjustments applied in the calculation of CET 1 Capital in accordance with Rule 4.29.

4.15. Criteria for classification as CET1 Capital

A capital instrument issued by a Bank is eligible for classification as common equity and for inclusion in CET 1 Capital, only if all of the following criteria in sub-rules (1) to (14) below are satisfied:

(1) The instrument is the most subordinated claim in case of the liquidation of the Bank.

(2) The holder of the instrument is entitled to a claim on the residual assets that is proportional with 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.

(3) 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.

(4) The Bank must not create an expectation at issuance that the instrument will be bought back, redeemed or cancelled. The statutory or contractual terms must not provide anything that might give rise to such an expectation.

(5) Distributions are paid out of distributable items of the Bank (including retained earnings) and the amount of distributions:

1. (a) is not tied or linked to the amount paid in at issuance; and
2. (b) is not subject to a contractual cap (except to the extent that a Bank may not pay distributions that exceed the amount of its distributable items).

(6) There are no circumstances under which the distributions are obligatory. Non-payment of distributions must not lead to default.

(7) Distributions are paid only after all legal and contractual obligations have been met and payments on all more senior capital instruments have been made. There are no preferential distributions to any pre-defined specified parties, including in relation to other CET1 Capital instruments and the terms of the instrument must not provide any preferential rights for payment of distributions.

(8) Compared to all the capital instruments issued by the Bank, the instrument must absorb the first and proportionately greatest share of any losses as they occur, and each instrument absorbs losses on a going-concern basis to the same degree as all other CET1 Capital instruments. Note This criterion in (8) above would be considered as fulfilled if the instrument includes a permanent write-down mechanism, as referred in Rule 4.17 (11) and 4.20.

(9) The paid-up amount is recognised as equity capital (rather than as a liability) for determining balance-sheet insolvency.

(10) The paid-in amount is classified as equity in accordance with the relevant accounting standards.

(11) The instrument is directly issued and paid-in, and the Bank has not directly or indirectly funded the purchase of the instrument.

(12) The paid-in amount is neither secured nor covered by a guarantee of the Bank 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 Bank’s creditors.

(13) The instrument is issued only with the approval of the owners of the Bank, 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.

(14) The instrument is clearly and separately disclosed on the Bank’s balance sheet.

4.16. Additional Tier 1 (AT1) Capital

AT 1 Capital is the sum of the following elements:

1. (a) instruments issued by a Bank that satisfy the criteria in Rule 4.17 for inclusion in AT1 Capital (and are not included in CET 1 Capital);
2. (b) share premium resulting from the issue of instruments included in AT1 Capital, according to
3. (a) above, if any;
4. (c) instruments, issued by consolidated Subsidiaries of the Bank and held by third parties, that satisfy the criteria in Rule 4.23 for inclusion in AT1 Capital (and are not included in CET 1 Capital of the respective Banks);
5. (d) regulatory adjustments applied in the calculation of AT1 Capital in accordance with Rule 4.28.

4.17 Criteria for inclusion in AT1 Capital

A capital instrument is eligible for inclusion in AT1 Capital only if that instrument meets all of the following criteria in sub-rules (1) to (15):

(1) The instrument is issued and paid-up.

(2) The instrument is the most subordinated claim after those of depositors, general creditors and holders of the subordinated debt of the Bank.

(3) The instrument is neither secured nor covered by a guarantee of the Bank 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 Bank’s creditors.

(4) The instrument is perpetual. It has no maturity date and there are no step-ups or other incentives to redeem.

(5) If the instrument is callable by the Bank, it can only be called 5 years or more after the instrument is paid-up and only with the approval of the AFSA. The Bank must not do anything to create an expectation that the exercise of the option will be approved, and, if the exercise is approved, the Bank:

1. (a) must replace the called instrument with capital of the same or better quality and at conditions sustainable for the income generation capacity of the Bank; or
2. (b) must demonstrate to the AFSA that its capital will exceed the Bank’s minimum capital requirement after the call option is exercised.

(6) A repayment of principal through repurchase, redemption or other means must be approved by the AFSA. The Bank must not assume, or create a market expectation, that such approval will be given.

(7) In respect of the dividend or coupon payable on the instrument

1. (a) The Bank has full discretion at all times to cancel distributions or payments;
2. (b) Any cancellation of a dividend or coupon is not an event of default;
3. (c) The Bank has full access to cancelled payments to meet obligations as they fall due; and
4. (d) Any cancellation of dividend or coupon does not impose restrictions on the Bank, except in relation to distributions to common shareholders.

(8) Dividends and coupons must be paid out of distributable items.

(9) 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 Bank’s credit standing.

(10) The instrument must not contribute to the Bank’s liabilities exceeding its assets if such a balancesheet test forms part of any insolvency law applying in the jurisdiction where the instrument was issued.

(11) 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 4.20.

(12) A write-down of the instrument has the following effects:

1. (a) reducing the claim of the instrument in liquidation;
2. (b) reducing the amount repaid when a call option is exercised;
3. (c) reducing or eliminating dividend or coupon payments on the instrument.

(13) Neither the Bank nor a related party over which the Bank exercises control or significant influence has purchased the instrument, nor has the Bank directly or indirectly funded the purchase of the instrument.

(14) The instrument has no features that hinder recapitalisation. For example, it must not require the Bank to compensate investors if a new instrument is issued at a lower price during a specified period.

(15) If the instrument is issued by a special purpose vehicle, the proceeds are immediately available without limitation to the Bank through an instrument that satisfies the other criteria for AT1 Capital.

4.18 .Tier 2 Capital (T2 Capital)

T2 Capital is the sum of the following elements:

1. (a) instruments issued by the Bank that satisfy the criteria in Rule 4.19 for inclusion in T2 Capital (and are not included in T1 Capital);
2. (b) share premium resulting from the issue of instruments included in T2 Capital according to
3. (a), if any;
4. (c) instruments, issued by consolidated Subsidiaries of the Bank and held by third parties, that satisfy the criteria in Rule 4.24 for inclusion in T2 Capital (and are not included in T1 Capital);
5. (d) regulatory adjustments applied in the calculation of T2 Capital in accordance with Rule 4.28;
6. (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 Chapter 5 of BBR).

Note General provisions and reserves are freely available to meet losses that subsequently materialise and therefore qualify for inclusion in T2 Capital. In contrast, provisions for identified deterioration of particular assets or known liabilities, whether individual or grouped, must be excluded because they would not be available to meet losses.

4.19. Criteria for inclusion in T2 Capital

A capital instrument is eligible for inclusion in T2 Capital only if all the criteria in sub-rules (1) to (10) below are satisfied.

(1) The instrument is issued and paid up.

(2) The instrument is subordinated to the claims of depositors and general creditors.

(3) The paid-in amount is neither secured nor covered by a guarantee of the Bank 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 Bank’s depositors and general creditors.

(4) The original maturity of the instrument is at least 5 years.

(5) The recognition in regulatory capital in the remaining 5 years before maturity is amortised on a straight line basis and there are no incentives to redeem.

(6) If the instrument is callable by the Bank, it can only be called 5 years or more after the instrument is paid-in and only with the approval of the AFSA. The Bank must not do anything to create an expectation that the exercise of the option will be approved, and, if the exercise is approved, the Bank:

• (a) must replace the called instrument with capital of the same or better quality with servicing costs sustainable for the income capacity of the Bank; or
• (b) must demonstrate to the AFSA that its capital will exceed the Bank’s minimum capital requirement after the call option is exercised.

(7) The holder has no right to accelerate future scheduled payments of coupon or principal, except in bankruptcy or liquidation.

(8) 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 Bank’s credit standing.

(9) Neither the Bank nor a related party over which the Bank exercises control or significant influence has purchased the instrument, nor has the Bank directly or indirectly funded the purchase of the instrument.

(10) If the instrument is issued by a special purpose vehicle, the proceeds are immediately available without limitation to the Bank through an instrument that satisfies the other criteria for T2 Capital.

4.20. Requirements—loss absorption at point of non-viability

(1) This rule applies to an AT1 or T2 Capital instrument issued by a Bank. 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 AFSA the discretion to direct that the instrument be written-off or converted to common equity on the happening of a Trigger event.

(3) The Bank 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, for the purposes of (2) above, in relation to the Bank that issued the instrument, is the earliest of:

• (a) a decision of the AFSA that a write-off (without which the Bank would become non-viable) is necessary; and
• (b) a decision by the relevant authority to make a public sector injection of capital, or give equivalent support (without which injection or support the Bank would become non-viable, as determined by that authority).

(5) If the Bank is a member of a financial group and the Bank 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 sub-rule (4) (a);
• (b) the decision in sub-rule (4) (b);
• (c) a decision, by the relevant authority in the Bank’s home jurisdiction, that a write-off (without which the Bank 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 Bank, to make a public sector injection of capital, or give equivalent support, in that jurisdiction (without which injection or support the Bank would become nonviable, 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.

(7) If the Bank 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 Bank or of the parent entity of the group.