In December 2007, the FSA published Discussion Paper 07/6: Definition of Capital (DP07/6). DP07/6 set out the FSA’s thinking and proposals on the definition of capital for the purposes of meeting minimum capital requirements (Pillar 1).
On 31 July 2008, the FSA published Feedback Statement 08/5: Definition of Capital - Feedback on DP07/6 (FS08/5). In FS08/5, the FSA summarised the responses it received to DP07/6 and indicated how it would take forward the issues raised.
The structure of FS08/5 was:
- Chapter 2: Principles and timelines – The FSA noted the support for more principles-based regulation (MPBR) as well as comments on the timing of DP07/6 in view of the international reviews and market failure/cost benefit analyses. The FSA also considered possible transitional arrangements for capital instruments that might not comply with possible future changes to the rules.
- Chapter 3: Going concern – The FSA responded to the comments it received on its interpretation and analysis of the three characteristics of going concern capital, namely loss absorbency, coupon flexibility and availability/permanence.
- Chapter 4: Gone concern – The FSA discussed the comments on how capital might absorb losses in insolvency and how its rules could be simplified. The FSA also considered in this chapter the comments on possible safeguards to ensure that capital is available when it is needed.
- Chapter 5: Limits – The FSA analysed feedback on simplifying the current limits and the proportion of going concern capital that should be in the form of common equity and reserves commonly referred to as core capital.
- Chapter 6: Deductions – The FSA responded to the comments on its rationale for deductions from capital and whether risk-weighting assets is a prudent alternative approach.
- Chapter 7: Reserves – The FSA summarised the comments on the treatment of reserves as regulatory capital, the interaction with the accounting treatment and the treatment of interim profits.
- Chapter 8: Capital for building societies, partnerships and limited liability partnerships – The FSA responded to comments on treating partnership/LLP capital as core tier 1.
The FSA will use the responses to DP07/6 to inform its work on the definition of capital in Basel. The FSA will also be focusing its attention to its ongoing discussions in the EU in relation to the Capital Requirements Directive amendments on hybrid capital instruments.
View FS08/5: Definition of Capital - Feedback on DP07/6, 31 July 2008