01 · Regulatory capital
Art 25–92a CRR · Art 128–142 CRD · BRRD
Purpose & history
2008: capital that did not absorb losses
What failed in 2008
- "Tier 1" full of hybrids — instruments that paid like debt and absorbed losses like debt: not at all, until resolution
- Deductions applied to total capital, so goodwill and DTAs padded headline ratios
- 8% minimum with no buffer above it — the first loss ate into the minimum, triggering crisis at the threshold
- No leverage constraint — model-light balance sheets grew 40–50× equity
- No resolution regime — the only loss-absorber beyond equity was the taxpayer
The Basel III / BRRD answer
- CET1 primacy: strict criteria (Art 28), deductions at CET1 level
- AT1 with going-concern triggers (5.125% conversion/write-down)
- Usable buffers stacked above the minima, enforced by MDA rather than licence withdrawal
- Leverage ratio as the model-free backstop
- Bail-in: TLAC/MREL pre-positions gone-concern capacity in creditor hands
The numerator is the part of the framework CRR3 barely touched — the 2010–2019 architecture held. What changed around it is the denominator (this chart's sections 02–07) and, through the output floor's single stack, how far one TREA number propagates into every requirement built on it.
The lineage
1988
Basel I: 8% of RWA, Tier 1 / Tier 2 defined loosely.
2004
Basel II rebuilds the denominator; the numerator's weaknesses ride along.
2008
Hybrids fail the test; governments recapitalise banks whose ratios were formally sound.
2010
Basel III: CET1 4.5%, buffers, leverage, quality criteria.
2014–15
BRRD and the FSB TLAC standard: bail-in becomes law.
2019
CRR2/BRRD2: binding leverage 3%, MREL calibrated, G-SII TLAC in EU law.
2024–25
CRR3: numerator stable; the floor's single stack makes the denominator reform reach every layer above.
Requirements
Operating the numerator
Issuance & permissionsPrior permission for calls, redemptions and buy-backs of own-funds and eligible-liabilities instruments (Art 77–78a); pre-approved headroom managed against issuance plans.
Eligibility reviewsTerms of every instrument mapped to the Art 28/52/63 and Art 72b criteria; legal opinions on file; grandfathering registers maintained.
Deduction dataIntangibles, DTAs by type, significant/non-significant FS holdings against the 10%/17.65% thresholds, IRB shortfall, prudent valuation (AVAs) — each a monitored data feed, not an annual memo.
MDA operationsDaily-capable computation of distributable amounts and the CBR position; board dividend and AT1-coupon decisions conditioned on it.
Consolidation scopePrudential vs accounting scope reconciled; minority-interest eligibility computed per subsidiary.
MREL programmeQuarterly reporting, issuance strategy across the group's resolution entities, internal MREL distribution, resolvability testing (bail-in playbooks, valuation data readiness).
Calculations
Threshold deduction — significant FS holding
CET1 before = €10.0bn · holding in a financial-sector entity = €1.2bn.
10% threshold = €1.0bn → deduct excess €0.2bn from CET1 · remaining €1.0bn risk-weighted at 250% = €2.5bn RWA
CET1 = €9.8bn, RWA +€2.5bn — the holding hits both sides of the ratio.
10% threshold = €1.0bn → deduct excess €0.2bn from CET1 · remaining €1.0bn risk-weighted at 250% = €2.5bn RWA
CET1 = €9.8bn, RWA +€2.5bn — the holding hits both sides of the ratio.
MDA — how close is too close
Requirement incl. CBR = 11.125% CET1 · bank at 10.4% · CBR = 5.5%.
CBR filled = (10.4 − 5.625)/5.5 = 87% → top quartile of the buffer → max 60% of eligible profits distributable (quartiles from the bottom: 0% / 20% / 40% / 60%). Dividends, AT1 coupons and bonuses compete for one capped envelope.
CBR filled = (10.4 − 5.625)/5.5 = 87% → top quartile of the buffer → max 60% of eligible profits distributable (quartiles from the bottom: 0% / 20% / 40% / 60%). Dividends, AT1 coupons and bonuses compete for one capped envelope.
Which constraint binds — risk vs leverage
TREA = €70bn → T1 needed ≥ 6% = €4.2bn
LREM = €250bn → T1 needed ≥ 3% = €7.5bn
Leverage binds — typical for low-RWA mortgage banks pre-floor; as the floor lifts TREA toward €100bn+ (×8.5% T1 = €8.5bn+), the binding constraint flips. Capital planning must track both curves crossing.
LREM = €250bn → T1 needed ≥ 3% = €7.5bn
Leverage binds — typical for low-RWA mortgage banks pre-floor; as the floor lifts TREA toward €100bn+ (×8.5% T1 = €8.5bn+), the binding constraint flips. Capital planning must track both curves crossing.
TLAC vs MREL, same bank
G-SII: TLAC = max(18% × TREA, 6.75% × LREM) = max(12.6, 16.9) = €16.9bn — the leverage leg binds here too. MREL (bank-specific) may sit above it once the recapitalisation amount reflects P2R.
Changes & sources
What CRR3 changed here
| Area | Change |
|---|---|
| Own-funds criteria | Substantively unchanged — the 2010 architecture held |
| Interaction | Single-stack output floor: floored TREA now drives P2R, buffers, MREL alike |
| Perimeter | Consolidation updates: fintech/ancillary undertakings, holding-company approval regime refinements |
Where the law lives
Art 25–92a CRR; buffers Art 128–142 CRD; MREL Art 45 ff BRRD / Art 92a–92b CRR for G-SIIs; the EBA Own Funds and MREL RTS stack and its standing Q&A practice, which functions as case law for instrument terms.
Open items
- Buffer usability: banks treat the CBR as a floor in practice — the macroprudential review keeps returning to whether releasable buffers should grow.
- AT1 credibility post-2023 (Credit Suisse write-down): pricing survived, the governance debate did not end.
Independent analysis by Elderlake Partners, as at August 2026. Not legal, accounting or supervisory advice.