46.Goodwill and all other intangibles must be deducted in the calculation of CET1 (this deduction includes mortgage servicing rights), including any goodwill included in the valuation of significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation. The full amount is to be deducted net of any associated deferred tax liability, which would be extinguished if the intangible assets become impaired or derecognized under the relevant accounting standards.

47.Banks are required to use the IFRS definition of intangible assets to determine which assets are classified as intangible and required to be deducted.

48.Deferred tax assets (DTAs) that rely on future profitability of the bank to be realized are to be deducted in the calculation of CET1. Deferred tax assets may be netted with associated deferred tax liabilities (DTLs) only if the DTAs and DTLs relate to taxes levied by the same taxation authority and the relevant taxation authority permits offsetting.

49.The treatment for DTA are classified as:

1. i.Where these DTAs relate to temporary differences (e.g. allowance for credit losses) the amount to be deducted is set out in the “threshold deductions”.
2. ii.All other DTAs, e.g. those relating to operating losses, such as the carry forward of unused tax losses, or unused tax credits, are to be deducted in full net of DTL as described above.

50.The DTLs permitted to be netted against DTAs must exclude amounts that have been netted against the deduction of goodwill, intangibles and defined benefit pension assets, and must be allocated on a pro rata basis between DTAs subject to the threshold deduction treatment and DTAs that are to be deducted in full.

51.An over-instalment of tax or, in some jurisdictions, current year tax losses carried back to prior years may give rise to a claim or receivable from the government or local tax authority. Such amounts are typically classified as current tax assets for accounting purposes. The recovery of such a claim or receivable would not rely on the future profitability of the bank and would be assigned the relevant sovereign risk weighting.

52.The amount of the cash flow hedge reserve that relates to the hedging of items that are not fair valued on the balance sheet (including projected cash flows) should be derecognized in the calculation of CET1. This means that positive amounts should be deducted and negative amounts should be added back.

53.This treatment specifically identifies the element of the cash flow hedge reserve that is to be derecognized for prudential purposes. It removes the element that gives rise to artificial volatility in common equity, as in this case the reserve only reflects one half of the picture (the fair value of the derivative, but not the changes in fair value of the hedged future cash flow).

54.Derecognize in the calculation of CET1 any increase in equity capital resulting from a securitization transaction, such as that associated with expected Future Margin Income (FMI) resulting in a gain-on-sale.

55.Derecognize in the calculation of CET1, all unrealized gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank’s own credit risk.

56.Defined benefit pension fund liabilities, as included on the balance sheet, must be fully recognized in the calculation of CET1 (i.e. CET1 cannot be increased through derecognizing these liabilities).

57.For each defined benefit pension fund that is an asset on the balance sheet, the asset should be deducted in the calculation of CET1 net of any associated deferred tax liability, which would be extinguished if the asset should become impaired or derecognized under the relevant accounting standards.

58.Assets in the fund to which the bank has unrestricted and unfettered access can, with Central Bank’s approval, offset the deduction. Such offsetting assets should be given the risk weight they would receive if they were owned directly by the bank.

59.This treatment addresses the concern that assets arising from pension funds may not be capable of being withdrawn and used for the protection of depositors and other creditors of a bank. The concern is that their only value stems from a reduction in future payments into the fund. The treatment allows banks to reduce the deduction of the asset if they can address these concerns and show that the assets can be easily and promptly withdrawn from the fund.

60.All of a bank’s investments in its own common shares, whether held directly or indirectly, will be deducted in the calculation of CET1 (unless already derecognized under the relevant accounting standards).

61.In addition, any own stock, which the bank could be contractually obliged to purchase, should be deducted in the calculation of CET1. The treatment described will apply irrespective of the location of the exposure in the banking book or the trading book. In addition:

1. i.Gross long positions may be deducted net of short positions in the same underlying exposure only if the short positions involve no counterparty risk.
2. ii.Banks should look through holdings of index securities to deduct exposures to own shares. However, gross long positions in own shares resulting from holdings of index securities may be netted against short position in own shares resulting from short positions in the same underlying index. In such cases, the short positions may involve counterparty risk (which will be subject to the relevant counterparty credit risk charge).

62.Following the same approach outlined above, banks must deduct investments in their own AT1 in the calculation of their AT1 capital and must deduct investments in their own Tier 2 in the calculation of their Tier 2 capital.

63.Reciprocal cross holdings of capital that are designed to artificially inflate the capital position of banks will be deducted in full from CET1.
 

64.The regulatory adjustment described in this Standard applies to investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation and where the bank does not own more than 10% of the issued common share capital of the entity. In addition,

1. i.Investments include direct, indirect and synthetic holdings of capital instruments. For example, banks should look through holdings of index securities to determine their underlying holdings of capital.
   
   If banks find it operationally burdensome to look through and monitor their exact exposure to the capital of other financial institutions as a result of their holdings of index securities, Central Bank may permit banks, subject to prior supervisory approval, to use a conservative estimate. The methodology for the estimate should demonstrate that in no case will the actual exposure be higher than the estimated exposure. If a look-through or an acceptable estimate are not possible, the full amount of the investment should be accounted for.
    
2. ii.Holdings in both the banking book and trading book are to be included. Capital includes common stock and all other types of cash and synthetic capital instruments (e.g. subordinated debt). It is the net long position that is to be included (i.e. the gross long position net of short positions in the same underlying exposure where the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least one year).
3. iii.Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included.
4. iv.If the capital instrument of the entity in which the bank has invested does not meet the criteria for CET1, AT1, or Tier 2 capital of the bank, the capital is to be considered common shares for the purposes of this regulatory adjustment.
5. v.Banks may, with prior Central Bank’s approval, exclude temporarily certain investments where these have been made in the context of resolving or providing financial assistance to reorganize a distressed institution.

65.If the total of all holdings listed above in aggregate exceed 10% of the bank’s common equity (after applying all other regulatory deductions in full, apart from the deductions outlined in this Standard (paragraph 63 to 71)) then the amount above 10% is required to be deducted from CET1.

66.Amounts below the threshold that are not deducted are to be risk weighted as follows:

1. i.Amounts below the threshold that are in the banking book are to be risk weighted as per the credit risk (i.e. investments that are not listed and not marked to market will be risk weighted at 150% and investments that are listed will be risk weighted at 100%).
2. ii.Amounts below the threshold that are in the trading book are to be risk weighted as per the market risk rules.

67.The regulatory adjustment described in this Standard applies to investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation where the bank owns more than 10% of the issued common share capital of the issuing entity or where the entity is an affiliate of the bank. An affiliate of a bank is defined as a company that controls, or is controlled by, or is under common control with, the bank. Control of a company is defined as (1) ownership, control, or holding with power to vote 20% or more of a class of voting securities of the company; or (2) consolidation of the company for financial reporting purposes. In addition,

1. i.Investments include direct, indirect and synthetic holdings of capital instruments. For example, banks should look through holdings of index securities to determine their underlying holdings of capital.
2. ii. Holdings in both the banking book and trading book are to be included. Capital includes common stock and all other types of cash and synthetic capital instruments (e.g. subordinated debt). It is the net long position that is to be included (i.e. the gross long position net of short positions in the same underlying exposure where the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least one year)
3. iii.Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included.
4. iv.If the capital instrument of the entity in which the bank has invested does not meet the criteria for CET1, AT1, or Tier 2 capital of the bank, the capital is to be considered common shares for the purposes of this regulatory adjustment. If the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant sector of the financial entity, it is not required to be deducted.
5. v.Banks may, with prior Central Bank’s approval, exclude temporarily certain investments where these have been made in the context of resolving or providing financial assistance to reorganize a distressed institution.

68.All investments included above that are not common shares must be fully deducted from CET1.

69.Investments included above that are common shares will be subject to the “Threshold deductions” treatment described in the section 4 below.