The remaining amount of 100 is to be distributed amongst the investments on a pro rata / proportionate basis and risk weighted at 250% (assuming no threshold deduction apply).The total of 250 RWA (100 *250%) will be distributed as follows.

The remaining amount of 75 is to be distributed amongst the investments on a pro rata / proportionate basis and risk weighted as stated below

Step 1: Individual Limit check

Risk weighting at 952% on account of 10% threshold on individual basis is 85.

Step 2: Aggregate Limit check

Total amount to be risk weighted at 952%: 335 (85 + 250)

This Appendix illustrates the treatment of minority interest and other capital issued out of subsidiaries to third parties, which is set out in section 2.7 of the Tier Capital Supply Standard (Paragraph 35 to 41).

A banking group consists of two legal entities that are both banks. Bank P is the parent, Bank S is the subsidiary, and their unconsolidated balance sheets are set out below

The balance sheet of Bank P shows that in addition to its loans to customers, it owns 70% of the common shares of Bank S, 80% of the Additional Tier 1 of Bank S and 25% of the Tier 2 capital of Bank S. The ownership of the capital of Bank S is therefore as follows:

The consolidated balance sheet of the banking group is set out below:

For illustrative purposes, Bank S is assumed to have risk-weighted assets of 100. In this example, the minimum capital requirements of Bank S and the subsidiary’s contribution to the consolidated requirements are the same since Bank S does not have any loans to Bank P. This means that it is subject to the following minimum plus capital conservation buffer requirements and has the following surplus capital:

The following table illustrates how to calculate the amount of capital issued by Bank S to include in consolidated capital, following the calculation procedure set out in paragraphs 35 to 41 of the Tier Capital Supply Standards.

The following table summarizes the components of capital for the consolidated group based on the amounts calculated in the table above. Additional Tier 1 is calculated as the difference between Common Equity Tier 1 and Tier 1 and Tier 2 is the difference between Total Capital and Tier 1.

This Appendix is meant to clarify the reporting of threshold deduction and calculation of the 10% limit on significant investments in the common shares of unconsolidated financial institutions (banks, insurance and other financial entities); and the 10% limit on deferred tax assets arising from temporary differences.

*This is a “hypothetical” amount of CET1 that is used only for the purpose of determining the deduction of above two items for the aggregate limit. Amount of CET1 = Total CET1 (prior to deduction) – All the deduction except the threshold deduction (i.e. all deduction outlined in para 44 to 68 of the Tier Capital Supply Standards) minus the total amount of both DTA that rely on future profitability and arise from temporary difference and significant investments in the unconsolidated financial institutions.

Assume a bank has the following capital ratios

From the above table, the bank has fulfilled all minimum capital requirements. In addition, the bank has to meet the additional capital buffers:

The table below shows the adjusted quartiles accordingly:

As the bank does not have Additional Tier 1, the bank has to use 8.5% of its available CET1 to fulfill the minimum Tier 1 requirement of 8.5%. Only the proportion of CET1 that is not allocated to fulfill the minimum capital requirements is freely available to fulfill the buffer requirement. For this bank, 1% CET1 is freely available, because the bank already used 8.5% of its CET1 to fulfill the Tier 1 ratio. (9.5% available CET1 - 8.5% CET1 required to fulfill the Tier 1 minimum requirement of 8.5%).

Impact: The bank breaches the effective CCB with 1% freely available CET1. Capital conservation is required by at least 80% of the bank’s earnings. Distributions to shareholders is limited to maximal 20% of the bank’s earnings (Central Bank approval of dividends still required).