Integration into Regulatory Capital Frameworks

Adrian Docherty

Since banks are regulated institutions, the regulatory treatment of accounting provisions is crucial. This chapter looks at how bank capital regulations ought to fit with expected credit-loss provisioning regimes.

THE ROLE OF REGULATORY CAPITAL

Regulatory capital is an important notion for banks. It defines a bank’s solvency and ability to operate without jeopardising the stability of the financial system. It determines the scope for value creation by a bank, since profits can be distributed to shareholders only once regulatory capital norms are satisfied. And it forms an integral part of the capital-allocation process, which drives many of the financial decisions that the bank must make in its business.

Regulatory capital is also where accounting numbers – including expected credit loss (ECL) provisions under IFRS 9 or CECL – become real. Why? Because regulatory capital rules have the ability to transform spectral accounting numbers into concrete cashflow requirements. In other words, if ECL provisions flow through the accounts, diminishing accounting and also regulatory equity, which subsequently needs to be replenished out of earnings retention or capital-raising, then

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