The sufficiency of a bank’s capital to meet its business requirements and regulatory obligations.
Capital Adequacy Directive
The 1993 European Directive (93/6/EEC) expanding the Basel regime to Investment Firms as well as introducing regulatory capital requirements for market risk. (See also Capital Requirements Directive).
Mandatory capital that financial institutions are required to hold in addition to other minimum capital requirements.
The amount of regulatory capital resources that a firm must hold. Synonym for Capital Resources Requirement.
Capital Conservation Buffer
A capital buffer introduced under Basel III intended to ensure that each individual bank maintains its capital levels above the minimum requirements throughout a significant sector down-turn.
Capital Requirements Directive
Originally, the amendment of the Consolidated Banking Directive (2000/12/EC) and the Capital Adequacy Directive (93/6/EEC), under which the second Basel Accord (Basel II) was implemented in the EU. There have since been numerous updates and the latest CRD IV and CRD V packages effectively implement the Basel III capital accord and subsequent Basel IV revisions.
Capital Requirements Regulation
EU direct regulation that implements Basel III and Basel IV rules without the need to be written into national law. This is designed to prevent EU member states ‘gold-plating’ or modifying EU legislation.
Capital Resources Requirement
The amount of capital that must be assigned to meet a firm's regulatory obligations, such as to cover credit risk, market risk and operational risk.
Cashflow Mismatch Risk
The risk that a firm has insufficient liquidity from high quality liquid assets (HQLA) and other liquidity inflows to cover liquidity outflows on a daily basis.
Maximum. On a sliding scale, the ceiling would be the maximum percentage or amount that would apply.
A national monetary and regulatory bank that controls a country’s money supply and interest rates.
A financial institution that acts as an intermediary between market participants, such as a clearinghouse that guarantees the performance of the trading contract. This reduces the amount of counterparty risk that market participants are exposed to.
Common Equity Tier 1 Capital. This is mostly restricted to share capital, share premium, retained earnings and regulatory adjustments (deductions).
Contingency Funding Plan. See Liquidity Contingency Plan.
Sudden increase in risk just beyond the timeframe of a stress test. For example, under the LCR the risk that maturity mismatches just beyond the 30-day horizon would result in a breach of minimum requirements.
A transaction for which the borrower provides assets (physical or financial) as security against a loan. The assets would become the property of the lender should the borrower fail to repay the loan; for example a mortgage, in which the property is the collateral.
Collective Investment Undertaking
An fund investing in transferable securities in accordance with a defined policy for the benefit of investors.
Combined (Capital) Buffer
Committee of European Banking Supervisors
Former advisor to the European Commission on banking regulation replaced by the European Banking Authority (EBA) in January 2011.
The risk of loss arising from a high proportion of exposures to a particular group of counterparties, such as large exposures, industry /commodity sectors (sectoral risk), geographical concentrations (country risk), sovereigns (sovereign risk) and market counterparties (counterparty risk).
The requirement to calculate capital requirements for an entire financial group rather than for an individual bank. This process is to ensure that the group as a whole has capital adequate to cover the risks in its regulated and unregulated entities.
Also called Tier 1 capital. The equity (share capital) and retained earnings of a financial institution.
Core Funding Ratio
A liquidity metric representing the proportion of total funding that is deemed as stable (or core) funding. See also Turner Ratio.
Lending by a financial institution that is made to an incorporated company rather than to an individual.
Countercyclical Capital Buffer
An add-on to capital requirements, introduced under Basel III, to be deployed by regulators during a period of excessive credit growth to protect against future losses.
The risk that a counterparty to a transaction will fail to fulfil their contractual obligations. Counterparty risk is greatest in contracts drawn up directly between two parties and least in contracts where an intermediary acts as the central counterparty.
A debt security backed by a pool of mortgage loans or public sector debt. The collateral, or ‘cover pool’, is usually put together so as to obtain the highest possible credit rating.
The CRD IV package, which includes the Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR). CRD IV effectively implements the Basel III accords within the EU, although it does not conform 100% to Basel III.
Amendments to CRD IV and CRR intended to make capital requirements more risk-sensitive and rules more proportionate for smaller financial institutions. It implements key outstanding Basel III standards, including the Leverage Ratio and NSFR, as well as many other BCBS proposals commonly dubbed Basel IV, such as the Fundamental Review of the Trading Book, Standardised Approach for Counterparty Credit Risk and treatment of Larger Exposures.
A bank, building society or investment firm that is subject to the Capital Requirements Directive.
Credit Conversion Factor
The weighting applied to off-balance sheet items to determine their exposure value (based on the type of exposure) under the Standardised Approach to credit risk, before applying credit risk weightings.
Credit Default Swap
An agreement under which the buyer of the CDS receives a payment should a credit obligation fail, effectively insuring against credit default.
Products such as futures, options and swaps, which derive their values from the movement in price of the underlying bank assets on which they are secured.
An undertaking that receives deposits or other repayable funds from the public and grants credits from its own accounts i.e. a bank or savings bank (from the Banking Consolidation Directive).
Credit Quality Step
Credit Risk Mitigation (CRM)
Techniques to reduce the credit risks to which a financial institution is exposed. Exposures may be collateralised, they may be guaranteed by a third party, or an institution may purchase a credit derivative to offset various forms of credit risk. Additionally they may agree to net loans owed to them against deposits from the same counterparty.
Credit Support Annex
An annex to the master agreement between two parties that trade over-the-counter derivatives, which documents the rules governing the mutual posting of collateral (that provides credit protection).
Credit Valuation Adjustment
Credit Risk Capital Requirement. The capital charge (or capital resources requirement) for credit risk.
The exchange of principal and interest in one currency for the same in another currency.
Current Exposure Method
The Basel I method for banks to estimate their exposure to counterparty credit risk for derivatives. The maximum potential increase in value before maturity is added to the market value of the derivative (or its replacement cost in the event of default). The result is then adjusted for the value of collateral and multiplied by the risk weight of the counterparty.
The failure by a party to fulfil their obligations on a loan repayment, future or options contract when they fall due. For regulatory purposes, default may be deemed to occur if the obligor is unlikely to pay or repayment is more than a specified number of days overdue.
Defined Liquidity Group
A group of entities that a firm’s regulatory supervisor has agreed may be relied upon for liquidity support or that rely upon the firm for liquidity support.
Deposit Guarantee Scheme
An undertaking that guarantees the reimbursement of deposits to depositors in the event that their bank has failed (provided the bank is a member of the scheme) and up to the maximum amount guaranteed. In the UK, the DGS is run by the FSCS.
A contract between two or more parties derived from one or more underlying assets. Its value is determined by fluctuations in the underlying asset(s). Common example derivative contracts are forwards, futures, options and swaps. Underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
The requirements under Pillar 3 for a financial institution / group to disclose information demonstrating how they meet their capital requirements.
See Present Value.