Eligible capital under Art. 4(1)(71)(a) and (b) CRR

The position C 04.00, r 220 (ID 11) "Eligible capital for the purposes of qualifying holdings outside the financial sector and large exposures" conflates two distinct definitions of "eligible capital", i.e. eligible capital for the purposes of Title III of Part Two CRR (cf. Art. 4(1)(71)(a) CRR) and eligible capital for the purposes of Art. 97 and Part Four CRR (cf. Art. 4(1)(71)(b) CRR). The two definitions of eligible capital differ with regard to the deduction under Art. 36(1)(k)(i) CRR and, if applicable, the resulting limitation in the eligibility of Tier 2 capital (which may not exceed one third of Tier 1 capital for the purposes of both lit. (a) and lit. (b)). Hence it is necessary to split the position into two positions.

Eligible capital under Art. 4(1)(71)(a) consists of "(i) Tier 1 capital as referred to in Article 25, without applying the deduction in Article 36(1)(k)(i); (iii) Tier 2 capital as referred to in Article 71 that is equal to or less than on third of Tier 1 capital as calculated pursuant to point (i) of this point" (Art. 4(1)(71)(a) CRR) Eligible capital under Art. (4)(1)(71)(b), however, consists of "(i) Tier 1 capital as referred to in Article 25; (ii) Tier 2 capital as referred to in Article 71 that is equal to or less than one third of Tier 1 capital" (Art. 4(1)(71)(b) CRR) The difference between the two definitions is the sum of the deductions under Art. 36(1)(k)(i) CRR and the respective amount of Tier 2 capital (i.e., up to one third of the deduction under Art. 36(1)(k)(i) CRR). To make the formal relationship between the two definitions more precise, the following equations hold: Define: Eligible capital under Art. 4(1)(71)(a) := ECA Eligible capital under Art. 4(1)(71)(b) := ECB Deductions under Art. 36(1)(k)(i) := D36_1_k_i Tier 1 capital := T1 Tier 2 capital := T2 Then it holds true that: ECA = ECB + AP36_1_k_i + min{1/3*AP36_1_k_i, max{0, T2 – 1/3*T1}} To illustrate this equation, consider the following example: T1 = 30 T2 = 11 AP36_1_k_i = 6 Then it follows that ECB = 30 + 1/3*30 = 40 while ECA = 30 + 6 + min{(30+6)*1/3; 11} = 30 + 6 + 11 = 47 Put differently, it holds that ECA = ECB + AP36_1_k_i + min{1/3*AP36_1_k_i, max{0, T2 – 1/3*T1}} = 40 + 6 + min{2; max{0; 11 – 10}} = 46 + min{2; 1} = 46 + 1 = 47 One easily observes that the two versions of "eligible capital" differ substantially.