The document discusses upcoming regulatory changes for banks in Europe. It outlines the timeline for implementing rules like the Bank Recovery and Resolution Directive (BRRD) and Capital Requirements Directive IV. These will strengthen bank capital requirements, introduce bail-in powers for regulators, and shift to a single bank supervisory mechanism under the European Central Bank by 2016. The document also examines what the new bank capital structure may look like, with higher and higher quality capital tiers to reduce risks of bank failures and taxpayer bailouts.

1. T H E B A N K I N G S Y S T E M
November 2014
Veenay Chheda
Email: veenay.chheda@hotmail.co.uk
Tel: +44 7808 164 001

2. Regulatory timeline – more to come
BRRD enters into force; PONV
for capital instruments
switched on
(1 Jan 15)
BRRD: proposed date for broader bail-in
tool to be switched on
(2016)
CRD IV / R implementation
(1 Jan 14)
EBA stress test
parameters released
(Jan 14)
Publication of BRRD in the
OJ (H1 14)
Tentative timeline
2014 2015 2016 2017 2018 2019
Leverage Ratio
disclosure
Leverage Ratio –
migration to pillar 1
LCR phased in
Stress test and AQR
results (Oct 14)
I C M A
4.5% CET1 NSFR
8.0% total capital
7% CET1+CCB3
10.5% total capital
+ CCB4
Basel committee
discussions on Leverage
ratio (Jan 14)
ECB takes over as
Eurozone bank supervisor
(Nov 14)
Please note that all these dates are best estimates based on the latest political negotiations and therefore subject to change; 1Single Resolution Mechanism;
2Single Resolution Fund (as part of the SRM); 3Excludes G-SIFI/O-SIFI/Systemic Risk buffers (“too big to fail”)
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3. The future of bank capital – solving for too big to fail?
G20
BCBS
FINANCIAL STABILITY
BURDEN SHARING
CET1
TIER 2
IMF
EC
CBRG
BASEL III / CRD IV
MORAL HAZARD
CAPITAL
LIQUIDITY
SIFI / SIB
PONV
LOSS ABSORPTION
GLAC / PLAC
BAIL-IN
I C M A
EBA
REGULATORS
BUFFERS
GOLD-PLATING
LCR / NSFR
PILLAR 2
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4. What would the bank capital structure look like?
More capital of higher quality
Basel II Basel III
Other eligible liabilities
Short dated subordinated
T2 / AT1 subject to limits
based on available capital
T2 / AT1 subject to minimum limits based on required capital
– no limits for maximum
debt
Tier 2 capital
2.0%
Additional Tier 1
1.5%
SIFI/Systemic Buffer
up to 3%
Common Equity Tier 1
Counter-cyclical buffer
0-2.5+%
Common Equity Tier 1
Bail-in buffer
(8% of total liabilities
20% of RWAs?)
Phase in
2016–2019
Bail-in of capital
instruments to be
I C M A
Tier 2 capital
4.0%
Additional Tier 1
2.0%
Note: Illustrated based on quality of capital
Capital conservation buffer
2.5%
Common Equity Tier 1
Common Equity Tier 1
4.5%
7% Common
Equity Tier 1
effective from 1 Jan 2015
Bail-in of all other eligible
liabilities to be effective
by 1 Jan 2016
Phase in
2016–2019
Common Equity Tier 1
2.0%
Maximum
Maximum
Minimum
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5. How does it all fit together
LCR/ NSFR
ECB’s Asset
Quality Review
RWAs
Assets
Equity
Own Funds
+
Eligible Liabilities
Liabilities1
Non CET1 capital
2 1 2 2 2 3
I C M A
Minimum requirements for own
funds and eligible liabilities (MREL)
Quantum: % of liabilities
% of RWAs
Other?
Available Capital
CET1 (%)
Tier 1 (%)
Total Capital (%)
Leverage Ratio
CET1/ Tier 1/ Total Capital
Exposure amount
Note: Not to scale
1 Includes deposits, secured and unsecured liabilities and other liabilities
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