Book traversal links for Appendix 4: Minority Interest Illustrative Example
Appendix 4: Minority Interest Illustrative Example
C 52/2017 STA Effective from 1/4/2021This Appendix illustrates the treatment of minority interest and other capital issued out of subsidiaries to third parties, which is set out in section 2.7 of the Tier Capital Supply Standard (Paragraph 35 to 41).
A banking group consists of two legal entities that are both banks. Bank P is the parent, Bank S is the subsidiary, and their unconsolidated balance sheets are set out below
Bank P Balance sheet | Amount (AED) | Bank S Balance sheet | Amount (AED) |
Assets | Assets | ||
Loan to customers | 100 | Loan to customers | 150 |
Investment in CET 1 of Bank S | 7 | ||
Investment in AT1 of Bank S | 4 | ||
Investment in T2 of Bank S | 2 | ||
Total Assets | 113 | Total Assets | 150 |
Liabilities and Equities | Liabilities and Equities | ||
Depositors | 70 | Depositors | 127 |
Common Equity (CET1) | 26 | Common Equity (CET1) | 10 |
Additional Tier1 (AT1) | 7 | Additional Tier1 (AT1) | 5 |
Tier 2 | 10 | Tier 2 | 8 |
Total Liabilities and Equities | 113 | Total Liabilities and Equities | 150 |
The balance sheet of Bank P shows that in addition to its loans to customers, it owns 70% of the common shares of Bank S, 80% of the Additional Tier 1 of Bank S and 25% of the Tier 2 capital of Bank S. The ownership of the capital of Bank S is therefore as follows:
Capital issued by Bank S | |||
Amount Issued to Parent | Amount Issued to third party | Total | |
Common Equity (CET1) | 7 | 3 | 10 |
Additional Tier1 (AT1) | 4 | 1 | 5 |
Tier 1 | 11 | 4 | 15 |
Tier 2 | 2 | 6 | 8 |
Total Capital (TC) | 13 | 10 | 23 |
The consolidated balance sheet of the banking group is set out below:
Consolidated Balance sheet of Bank P | |
Assets | Amount (AED) |
Loan to customers | 250 |
Total Assets | 250 |
Liabilities and Equities | |
Depositors | 197 |
Common Equity (CET1) | 26 |
Additional Tier1 (AT1) | 7 |
Tier 2 | 10 |
Minority Interest | |
Common Equity (CET1) | 3 |
Additional Tier1 (AT1) | 1 |
Tier 2 | 6 |
Liabilities and Equities | 250 |
For illustrative purposes, Bank S is assumed to have risk-weighted assets of 100. In this example, the minimum capital requirements of Bank S and the subsidiary’s contribution to the consolidated requirements are the same since Bank S does not have any loans to Bank P. This means that it is subject to the following minimum plus capital conservation buffer requirements and has the following surplus capital:
Minimum and surplus capital of Bank S | ||
Capital | Minimum plus Capital conservation Buffer | Surplus |
CET1 | (7% + 2.5%) of 100 = 9.5 | 0.50 (10- 9.5 ) |
T1 | (8.5%+ 2.5%) of 100 = 11 | 4.00 (10+5-11) |
TC | (10.5% +2.5%) of 100 = 13 | 10 (10+5+8 -13) |
The following table illustrates how to calculate the amount of capital issued by Bank S to include in consolidated capital, following the calculation procedure set out in paragraphs 35 to 41 of the Tier Capital Supply Standards.
Bank S: amount of capital issued to third parties included in the consolidated capital. | |||||
Capital | Total Amount Issued (A) | Total Amount Issued to third party (B) | Surplus (C) | Surplus attributable to third parties (i.e. amount excluded from consolidated capital) (D) = ( C) * (B/A) | Amount Included in the consolidated capital (E) = (B)-(D) |
CET1 | 10 | 3 | 0.5 | 0.15 | 2.85 |
T1 | 15 | 4 | 4 | 1.07 | 2.93 |
TC | 23 | 10 | 10 | 4.35 | 5.65 |
The following table summarizes the components of capital for the consolidated group based on the amounts calculated in the table above. Additional Tier 1 is calculated as the difference between Common Equity Tier 1 and Tier 1 and Tier 2 is the difference between Total Capital and Tier 1.
Bank S: amount of capital issued to third parties included in the consolidated capital. | |||
Capital | Total amount issued by Parent (all of which is to be included in consolidated capital) | Amount issued by subsidiaries to third parties to be included in the consolidated capital | Total amount of capital issued by parent and subsidiary to be included in the consolidated capital |
CET1 | 26 | 2.85 | 28.85 |
AT1 | 7 | 0.08 | 7.08 |
T1 | 33 | 2.93 | 35.93 |
T2 | 10 | 2.72 | 12.72 |
TC | 43 | 5.65 | 48.65 |