Ramirez Juan - Enhancing Bank Capital in Practice

1. Chapter 2: Minimum Capital Requirements
2. Chapter 3: Common Equity 1 (CET1) Capital
3. Chapter 4: Additional Tier 1 (AT1) Capital
4. Chapter 5: Tier 2 Capital
5. Chapter 6: Contingent Convertibles (CoCos)
6. Chapter 7: Additional Valuation Adjustments (AVAs)
7. Chapter 8: Accounting vs. Regulatory Consolidation
8. Chapter 9: Treatment of Minority Interests in Consolidated Regulatory Capital
9. Chapter 10: Investments in Capital Instruments of Financial Institutions
10. Chapter 12: Equity Investments in Nonfinancial Entities
11. Chapter 13: Deferred Tax Assets (DTAs)
12. Chapter 14: Asset Protection Schemes and Bad Banks
13. Chapter 15: Approaching Capital Enhancement Initiatives

1. Chapter 1: Overview of Basel III
2. Chapter 2: Minimum Capital Requirements
3. Chapter 3: Common Equity 1 (CET1) Capital
4. Chapter 4: Additional Tier 1 (AT1) Capital
5. Chapter 5: Tier 2 Capital
6. Chapter 6: Contingent Convertibles (CoCos)
7. Chapter 7: Additional Valuation Adjustments (AVAs)
8. Chapter 8: Accounting vs. Regulatory Consolidation
9. Chapter 9: Treatment of Minority Interests in Consolidated Regulatory Capital
10. Chapter 10: Investments in Capital Instruments of Financial Institutions
11. Chapter 11: Investments in Capital Instruments of Insurance Entities
12. Chapter 12: Equity Investments in Nonfinancial Entities
13. Chapter 13: Deferred Tax Assets (DTAs)
14. Chapter 14: Asset Protection Schemes and Bad Banks
15. Chapter 15: Approaching Capital Enhancement Initiatives

This edition first published 2017

2017 Juan Ramirez

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Library of Congress Cataloging-in-Publication Data is available

ISBN 9781119330820 (hardcover) ISBN 9781119330806 (ePDF)

ISBN 9781119330899 (ePub)

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To my wife Marta and our children Borja, Martuca and David

Often banks feel Basel III regulations are excessively conservative and act as a deterrent to investors looking for attractive returns. However, Basel III is an opportunity for banks to improve their asset quality and riskreturn profiles. It encourages a strategic approach to decisions about businesses and assets, allocating precious capital toward opportunities that fit the bank's actual risk and return profiles, and exerting pressure to shed unattractive positions.

This book tries to fill a gap in the financial literature on regulatory bank capital. I found a substantial number of excellent books often written by developers of quantitative models on the estimation of credit risk parameters (i.e., exposures, probabilities of default and so on). There also several good books providing a general overview of Basel III, which are useful to grasp an introductory knowledge of the regulation, but that might be too elementary for regulatory capital professionals.

This book has two objectives: (i) to provide readers with a deep understanding of the principles underpinning the capital dimension of Basel III (i.e., the numerator of the capital ratio calculation) and (ii) to be exposed to reallife cases of initiatives to enhance capital. The first objective is a notably challenging one due to the large number of complex rules and because it requires a thorough understanding of the accounting treatment of the items affecting regulatory capital. To meet the second objective, a large number of real case studies have been included.

This book is aimed primarily at capital practitioners at banks, bank equity analysts, institutional investors and banking supervisors. I believe that it is also a useful resource for structurers at investment banks developing capitalefficient transactions and for professionals at auditing, consulting and law firms helping client banks to enhance their capital positions.

Whilst the Basel III rules are intended to provide a common framework for financial institutions, its implementation may vary across the globe, as national supervisors have discretion about the domestic implementation of the Basel III rules. This book is based on the European Union version of Basel III, which is referred to as CRD IV. Whilst some particular changes to the general Basel III framework are introduced by the CRD, most of its contents are likely to be common to the regulation of other jurisdictions.

The interpretations described in this book are those of the author alone and do not reflect the positions of the entities which the author is or has been related to.

Juan Ramirez currently works for Deloitte in London, assessing the accounting treatment, risk management and regulatory capital impact of complex transactions.

Prior to joining Deloitte, Juan worked for 20 years in investment banking in sales and trading at JP Morgan, Lehman Brothers, Barclays Capital, Santander and BNP Paribas. He has been involved with interest rate, equity, FX and credit derivatives. Juan holds an MBA from University of Chicago and a BSc in electrical engineering from ICAI.

Juan is the author of the books Accounting for Derivatives and Handbook of Corporate Equity Derivatives and Equity Capital Markets, both published by Wiley.

Bank executives are in a difficult position. On the one hand their shareholders require an attractive return on their investment. On the other hand, banking supervisors require these entities to hold a substantial amount of expensive capital. As a result, banks need capitalefficient business models to prosper.