CAPITAL MEASUREMENT AND CAPITAL STANDARDS BASEL II/III CAPITAL DEFINITION AND PILLAR I FRAMEWORK January 2020 2 Table of contents ABBREVIATIONS ...................................................................................................................................... 4 1 INTRODUCTION ........................................................................................................................... 5 1.1 Authority ......................................................................................................................................... 5 1.2 Purpose ........................................................................................................................................... 5 1.3 Overview ......................................................................................................................................... 5 1.4 Minimum Capital Adequacy Requirement ......................................................................................... 6 1.5 Regulatory Reporting Requirements ................................................................................................. 6 1.6 Commencement ............................................................................................................................... 6 2 SCOPE OF APPLICATION ............................................................................................................... 7 2.1 Treatment of Significant Minority Investments ................................................................................. 7 2.2 Treatment of Insurance Institutions .................................................................................................. 7 2.3 Significant Investments in Commercial Entities ................................................................................. 8 2.4 Deduction of Investments ................................................................................................................ 8 3 CAPITAL DEFINITION.................................................................................................................... 9 3.1 Components of Capital ..................................................................................................................... 9 3.2 Limits and Minima.......................................................................................................................... 10 3.3 Capital Consolidation ..................................................................................................................... 10 3.4 Common Equity Tier 1 .................................................................................................................... 12 3.5 Additional Tier 1 Capital ................................................................................................................. 18 3.6 Tier 2 Capital .................................................................................................................................. 21 3.7 Additional Reporting Requirements ................................................................................................ 24 4 CREDIT RISK MINIMUM CAPITAL REQUIREMENT ........................................................................ 25 4.1 Risk Weight Categories ................................................................................................................... 25 4.2 Cash items ..................................................................................................................................... 25 4.3 Claims on Sovereigns ...................................................................................................................... 25 4.3.1 Claims on Non-Central Government Public Sector Entities ................................................................... 26 4.3.2 Claims on Multilateral Development Banks ........................................................................................... 26 4.3.3 Claims on banks ..................................................................................................................................... 27 4.3.4 Claims on securities firms ...................................................................................................................... 27 4.3.5 Claims on corporates, insurance companies, and other financial corporates ....................................... 28 4.3.6 Claims included in the regulatory retail portfolio (individuals or small business) ................................. 28 4.3.7 Claims secured by residential property ................................................................................................. 28 4.3.8 Claims secured by commercial property................................................................................................ 29 4.3.9 Securitization exposures ........................................................................................................................ 29 4.3.10 Defaulted Exposures .............................................................................................................................. 29 4.3.11 Other exposures ..................................................................................................................................... 30 4.3.12 Off-Balance Sheet Instruments .............................................................................................................. 30 4.3.13 Over the Counter Derivative Transactions ............................................................................................. 31 4.3.14 Security Financing Transactions ............................................................................................................. 31 4.4 Credit Risk Mitigation ..................................................................................................................... 32 4.5 CRM Techniques and Requirements ................................................................................................ 32 4.6 Collateralized Transactions ............................................................................................................. 33 4.6.1 On-balance Sheet Netting ...................................................................................................................... 35 4.6.2 Third-party Guarantees .......................................................................................................................... 35 5 MARKET RISK MINIMUM CAPITAL REQUIREMENT ...................................................................... 38 5.1 Definitions and Scope of Application .............................................................................................. 38 5.1.1 Financial Instruments ............................................................................................................................. 38 5.1.2 Trading Book .......................................................................................................................................... 38 5.1.3 Prudent Valuation Guidance .................................................................................................................. 39 5.1.4 Market Risk Stress Tests......................................................................................................................... 39 5.2 Measurement of Market Risk ......................................................................................................... 39 5.2.1 Interest Rate Risk ................................................................................................................................... 40 5.2.2 Equity risk ............................................................................................................................................... 45 5.2.3 Foreign exchange risk ............................................................................................................................. 45 5.2.4 Commodities risk ................................................................................................................................... 46 5.2.5 Treatment of options ............................................................................................................................. 46 6 OPERATIONAL RISK MINIMUM CAPITAL REQUIREMENT ............................................................. 48 6.1 Definition ....................................................................................................................................... 48 6.2 Measurement of Operational Risk .................................................................................................. 48 6.2.1 The Business Indicator ........................................................................................................................... 48 6.2.2 Exclusions from the Business Indicator .................................................................................................. 51 6.2.3 The Business Indicator Component ....................................................................................................... 51 ANNEX I ................................................................................................................................................ 53 ANNEX II ............................................................................................................................................... 58 3 ABBREVIATIONS ABCP Asset-backed commercial paper BCBS Basel Committee on Banking Supervision CAR Capital adequacy ratio