Solvency, Liquidity and Other Regulation After the Global Financial Crisis: formula sheet

Key formulas

Minimum capital ratios (% of RWA)

CET1 ≥ 4.5%; Tier 1 ≥ 6%; Total capital ≥ 8%

Pillar 1 minimums, before buffers. Tier 1 = CET1 + Additional Tier 1.

Capital conservation buffer

2.5% of RWA, met with CET1

Falling inside it triggers distribution restrictions, not a breach of the minimum.

Countercyclical buffer

0% to 2.5% of RWA, met with CET1

Set by national authorities. A bank's own rate is the exposure-weighted average across jurisdictions.

CET1 with buffers

4.5% + 2.5% + CCyB = 7% to 9.5%

Excludes any G-SIB surcharge.

Total capital with buffers

8% + 2.5% + CCyB = 10.5% to 13%

Buffers are CET1, but the total requirement is stated against RWA.

Leverage ratio

Tier 1 capital ÷ Total exposure measure ≥ 3%

Not risk-weighted. Equivalent to a maximum leverage of about 33.3 times.

Liquidity Coverage Ratio

LCR = Stock of HQLA ÷ Total net cash outflows over next 30 calendar days ≥ 100%

Outflows are stressed. HQLA is after haircuts and caps.

Net cash outflows

Net outflows = Total expected outflows − MIN(Total expected inflows, 75% × Total expected outflows)

Inflows are capped at 75% of outflows, so net outflows are at least 25% of outflows.

Outflow or inflow amount

Amount = Balance × run-off rate (or inflow rate)

Each category has its own prescribed rate.

Net Stable Funding Ratio

NSFR = Available stable funding (ASF) ÷ Required stable funding (RSF) ≥ 100%

ASF = Σ(liability or capital × ASF factor). RSF = Σ(asset or exposure × RSF factor).

HQLA composition limits

Level 2 ≤ 40% of HQLA; Level 2B ≤ 15% of HQLA

Caps apply after haircuts. Level 1 has no cap and no haircut.

Horizons

LCR: 30 days. NSFR: 1 year.

LCR is short-term resilience. NSFR limits structural maturity mismatch.

G-SIB indicator categories

Size, Interconnectedness, Substitutability, Complexity, Cross-jurisdictional activity (each 20% of the score)

Five categories, equally weighted. Learn all five. Each category is built from indicators, and the score is a share of the sample total.

Category score

Indicator score = (bank's indicator value ÷ sample total) × 10,000 basis points

Scores are in basis points. The overall score is the weighted average across the categories.

G-SIB surcharge

Required CET1 = minimum + capital conservation buffer + G-SIB surcharge (+ any countercyclical buffer)

The surcharge is met entirely with CET1 and rises with the bucket. The Basel framework starts at 1.0% and rises in steps of 0.5%. The highest bucket is left empty.

TLAC minimum (FSB term sheet)

Minimum TLAC ≥ 18% of risk-weighted assets and ≥ 6.75% of the Basel III leverage ratio denominator (from 2022)

These minimums are separate from the capital buffers, which must be met on top of them. Phase-in began with 16% and 6% in 2019.

Projected capital ratio

Ratio = Projected capital ÷ Projected risk-weighted assets

Use the stressed capital figure and stressed RWA at each quarter. The minimum ratio over the horizon is the one that matters.

Change in capital over the horizon

Ending capital = Starting capital + Net income (after provisions and losses) − Dividends − Buybacks + Issuance

Net income = pre-provision net revenue − provisions − other losses, adjusted for tax. Capital actions are part of the plan being tested.

Capital depletion

Depletion (percentage points) = Starting ratio − Minimum projected ratio

This is the decline in the ratio at the trough. Distinguish percentage points from percent.

Buffer shortfall test

Shortfall if Minimum projected ratio < Required minimum + buffer

Compare with the correct requirement for each ratio, such as CET1, Tier 1, total capital or leverage.

Programme distinction

CCAR = stress results + capital plan review (qualitative and quantitative); DFAST = supervisory stress test under Dodd-Frank

Know which one looks at capital actions and planning process.

Volcker Rule scope

Banned: proprietary trading + owning/sponsoring covered funds. Permitted (not an exhaustive list): market making, hedging, underwriting, US government securities, plus other exemptions such as obligations of US agencies, GSEs and states/municipalities, trading on behalf of customers and certain foreign-offshore activity

Applies to banking entities. Exemptions require documented, demand-linked, hedge-purpose activity.

Clearing mechanism (novation)

Trade A–B becomes A–CCP and CCP–B

The CCP becomes counterparty to both sides and manages risk through margin and a default fund.

Uncleared margin: initial margin

IM ≈ 99% one-sided potential loss over a 10-day margin period of risk

Under the BCBS-IOSCO framework. Segregated, no rehypothecation. Collected by both parties, not netted against each other.

Variation margin

VM = change in mark-to-market value of the netting set

Exchanged regularly, typically daily, to remove current exposure.

Initial margin threshold

IM threshold of up to €50 million (BCBS-IOSCO); $50 million under the US prudential regulators' rule

Under the BCBS-IOSCO framework, the threshold is up to €50 million. The US prudential regulators' rule uses $50 million. It is an IM exemption amount, applied at the level of the consolidated groups and based on the non-centrally cleared derivatives between the two consolidated groups. Bilateral IM below the threshold need not be exchanged. The threshold applies to IM only, not to VM. VM is exchanged regularly, but a minimum transfer amount of up to €500,000 applies to combined IM and VM, so a call below that amount need not be transferred.

Quick revision

• Leverage ratio = Tier 1 capital ÷ total exposure measure, a non-risk-based backstop with a Basel minimum of 3%.
• CET1 is the highest quality capital, mainly common equity and retained earnings.
• The capital conservation buffer is 2.5% of risk-weighted assets, held in CET1.
• LCR = HQLA ÷ net cash outflows over a 30-day stress period, minimum 100%.
• NSFR = available stable funding ÷ required stable funding over one year, minimum 100%.
• LCR is short term and about liquid assets; NSFR is longer term and about funding structure.
• G-SIBs face higher loss absorbency surcharges based on their systemic importance.
• TLAC requires G-SIBs to hold enough loss-absorbing capacity to be recapitalized in resolution.
• D-SIBs are identified by national authorities for domestic systemic importance.
• DFAST and CCAR are US stress-testing programmes; CCAR also reviews capital planning and distributions.
• The Volcker Rule restricts proprietary trading and certain fund investments by banks.
• Basel III finalization revises risk-weighted asset calculation and replaces earlier operational risk approaches with a standardized approach.

Common mistakes

• Treating the conservation buffer as part of the minimum, so a bank inside it is called in breach. Fix: Minimum breach is below 4.5% CET1. Inside the buffer means restrictions on dividends, buybacks and bonuses only.
• Using RWA as the denominator for the leverage ratio. Fix: The leverage ratio uses unweighted total exposure. Its point is to ignore risk weights.
• Counting all inflows against outflows without the 75% cap Fix: Always compare inflows with 75% of outflows and use the smaller one.
• Forgetting haircuts on Level 2 assets Fix: Level 1 has no haircut. Apply 15% to Level 2A and the higher haircuts to Level 2B before summing.
• Treating D-SIB identification as a Basel scoring formula. Fix: Remember that Basel gives D-SIB principles only. National authorities choose the method and the surcharge.
• Listing cross-jurisdictional activity as a D-SIB criterion. Fix: The D-SIB assessment focuses on domestic impact. Cross-jurisdictional activity is specific to G-SIBs.
• Treating CCAR and DFAST as the same thing Fix: Remember that DFAST is the stress test; CCAR also reviews the capital plan, governance and planned capital actions.
• Using the ending capital ratio instead of the minimum over the horizon Fix: Test the lowest projected ratio across all quarters. The trough drives the result.
• Saying the Volcker Rule bans all trading by banks. Fix: Remember the permitted activities: market making, hedging, underwriting and government securities, plus other exemptions such as agency, GSE and municipal obligations, customer trading and certain foreign-offshore activity.
• Claiming all OTC derivatives must be centrally cleared. Fix: Only standardized, sufficiently liquid products must be cleared. Others face uncleared margin rules, and some end users are exempt.

Exam tips

• Always check the denominator. The leverage ratio uses total exposure, not RWA.
• Questions on buffers usually test consequences: distribution restrictions, not closure or automatic failure.
• Know that buffers are met with CET1 and the CCyB is jurisdiction-weighted and set between 0% and 2.5%.
• When RWA is small relative to exposure, expect the leverage ratio to be the binding constraint.
• Do the arithmetic in percentages first, then convert to currency only if asked for a shortfall.
• Expect numeric LCR questions with an inflow cap trap. Check it before anything else.
• Know which assets are Level 1, 2A and 2B and the 40% and 15% limits. Questions often test classification.
• For NSFR, remember the logic: long-term illiquid assets need higher RSF factors, and stable deposits and equity get high ASF factors.