Too big to fail. Term used to denote a bank that would substantially damage the financial system and the rest of the economy should it fail. See also Systemically Important Financial Institution.
Minimum requirements that firms must meet at all times in order to be permitted to carry on the regulated activities in which they engage. Firms will need to meet both FCA-specific and PRA-specific Threshold Conditions under the UK regulatory framework.
Tier 1 Capital
The highest quality form of a bank’s capital. It is composed of core capital, which consists primarily of common stock and disclosed reserves (or retained earnings), perpetual non-cumulative preference shares and innovative tier one capital. Under Basel III, innovative hybrid capital instruments with step-up clauses are being phased out.
Tier 2 Capital
Tier 2 capital is supplementary bank capital that includes items such as undisclosed reserves, general loss reserves, hybrid debt/equity capital and subordinated debt of a financial institution.
Tier 3 Capital
Also called Ancillary capital. This short-term subordinated debt was used under Basel II to support market risk from trading activities. This type of capital is abolished under Basel III.
Total Capital Requirement
Total Loss-Absorbing Capacity
A trading book consists of positions in financial instruments and commodities held either with intent to trade, or in order to hedge other elements of the trading book. To be eligible for trading book capital treatment, financial instruments must either be free of any restrictive covenants on their tradability, or able to be hedged completely. In addition, positions should be frequently and accurately valued, and a portfolio should be actively managed.
The Standardised Approach to Operational Risk under Basel II.
Through the Cycle. The recurring and fluctuating levels of economic activity experienced over a long period of time. In the context of an internal ratings system, an approach that leaves a borrower's rating unchanged over the course of the credit business cycle, but that expects default levels for each grade to vary with the cycle.
A Core Funding Ratio that represents the total of retail deposits plus long-term wholesale funding (over 1 year) as a proportion of total liabilities.
Undertaking for Collective Investments in Transferable Securities. UCITS are collective funds which can be sold across national borders within the EU in accordance with the UCITS Directive.
Assets not pledged (either explicitly or implicitly) to secure, collateralise or credit enhance any transaction. For regulatory purposes, assets received in reverse repo transactions that have not been rehypothecated (and legally available for the bank’s use) are considered ‘unencumbered’.
Where a bank has committed to the sale of equity or other security, but the payment and delivery has not yet been settled.
The process by which a bank ensures that an IRB or similar system is producing accurate and consistent results in line with its underlying objectives and regulatory requirements.
Value at Risk model
A statistical technique designed to give an estimate of the maximum loss that could be made for a given factor of confidence over a set time horizon under normal market conditions.
Fund made available for start up firms and or small businesses with exceptional growth potential.
The amount of uncertainty or risk about the size of changes in the value or measure of an asset or liability. For example, provisions for loan defaults may assume average expected losses. The potential for eventual losses, and therefore provisions, to vary from this expectation is a source of volatility risk.
Voluntary Requirement (VREQ)
An agreement with the PRA under which a bank agrees not to use any CET1 capital maintained to meet its ICG to also meet the CRD IV combined buffer. Although ‘voluntary’, if a bank does not accept the PRA’s invitation to apply for a VREQ, the PRA will consider using its powers to impose one of its own initiative.
A direction waiving or modifying a rule set by the supervisory authority.
See Wrong-Way Risk.
The risk that arises when the exposure at default is positively (adversely) correlated to the probability of default (or credit quality of the counterparty). Put another way, when default risk and credit exposure increase together.