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CRD IV Package Legal Framework

  • Kamil Liberadzki
  • Marcin Liberadzki

Abstract

Under the CRD IV regulatory package, EU banks have to fulfill certain capital requirements, which are grouped inter alia as Tier 1 and Tier 2 financial instruments. Tier 1 instruments constitute the ‘going-concern capital’ of the financial institution, while Tier 2 instruments form the ‘gone-concern capital’. This means that Tier 1 instruments may absorb losses of the institution on an ongoing basis, while Tier 2 instruments absorb losses when a financial institution becomes insolvent or faces liquidation. The core of this system is an instrument known as the Common Equity Tier 1 (CET1). A CET1 must be composed of the highest quality of capital and possess maximum loss-absorption capacity. CET1 instruments are mainly common shares and retained earnings, while hybrid bonds may be assigned to either the category of Additional Tier 1 (AT1) or that of Tier 2 (T2), provided that certain criteria are met. These criteria also may be classified in a manner reflecting the aforementioned dimensions of the debt–equity continuum (Figure 4.1).

Keywords

Euro Area Capital Requirement Equity Continuum Preference Share Contagion Risk 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Kamil Liberadzki and Marcin Liberadzki 2016

Authors and Affiliations

  • Kamil Liberadzki
    • 1
  • Marcin Liberadzki
    • 1
  1. 1.Warsaw School of EconomicsPoland

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