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Here to help with Regulation and Compliance

Compound Growth

2nd January 2016

New Capital Buffers for Investment Firms

The introduction of new capital buffers under CRD IV takes effect this year affecting capital calculations from the 1st January 2016.

Affected firms will have to report upon these via their COREP returns for the 01January to 31March 2016 reporting period for the first time in May 2016 when the reporting deadline is due.

What are the new Capital Buffers?

There are two new capital buffer rates introduced in 2016. These are the capital conservation buffer and the counter cyclical buffer.

The new capital buffers are intended to address systemic issues, rather than firm specific ones, by providing an additional monetary policy tool which, for the UK, is controlled by the Monetary Policy Committee.

Affecting only a relatively small population of firms, the new buffer rates are set to affect Banks and some investment firms that do not otherwise meet the exemptions for SMEs and micro enterprises as laid out in the regulators IFPRU sourcebook.

Capital Conservation Buffer for Investment Firms

The Capital Conservation Buffer is a fixed rate buffer that is required under Basel III requirements. Firms must calculate a Capital Conservation Buffer total to 2.5% of their total risk exposure, however this buffer rate is being phased in over a transition period of 2016 to 2019. The Capital Conservation rate in 2016 will be 0.625% and will increase by this amount each year until it reaches 2.5% in 2019.

“A firm must calculate a capital conservation buffer of common equity tier 1 capital equal to 2.5% of its total risk exposure amount.” FCA IFPRU 10.2

The effect of failing to maintain this buffer is set out in IFPRU 10.4 and 10.5 which require a firm not meeting the combined buffer requirements to design and implement a plan to remediate the situation. Thus the buffers do not appear to be intended, therefore, as a threshold condition.

Countercyclical Capital Buffer for Investment Firms

The Countercyclical Capital Buffer is a variable rate buffer calculated in accordance with the level of a firm’s exposure in foreign jurisdictions as IFPRU states:

“A firm must calculate a countercyclical capital buffer of common equity tier 1 capital equal to its total risk exposure amount multiplied by the weighted average of the countercyclical buffer rates that apply to exposures in the jurisdictions where the firm's relevant credit exposures are located.” FCA

Thus, the Countercylical Capital Buffer should be calculated according to an average of jurisdiction specific buffer rates (as advised by the Bank of England) weighted in accordance with a firm’s own exposure to those jurisdictions.

Additional Information & COREP Support

More information about how these new capital buffers affect a firm’s COREP reporting can be found on our dedicated COREP Support site, alternatively please do not hesitate to contact us for any COREP reporting enquiries or assistance you may require.

CRD IV: New Capital Buffers for 2016

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