CP13/6 - CRD IV for Investment Firms - Financial Conduct Authority

CP13/6
CRD IV for Investment Firms
35. The actual capital compliance costs for a firm depend on their levels and composition of capital and
will therefore vary on a firm-by-firm basis. Providing an accurate estimate of capital compliance
costs is very resource intensive. As we do not have to estimate the costs arising from Regulation,
we have provided data on how the costs arise, the different options for firms based on their
existing capital structure, as well as some estimates of the potential magnitude of capital costs
using some assumptions. We are not providing an exact calculation of the capital compliance
costs that CRD IV will entail for the investment firms affected by it and within our remit.
36. Table 18 outlines the change between GENPRU and CRD IV Pillar 1 capital requirements. In
order to allow comparisons, it assumes parity between GENPRU and CRD IV capital tiers.
However, CRD IV definition of capital is more stringent than GENPRU, so this is a simplifying
assumption. These are subject to transitional arrangements until 31 December 2014. Until then
we have proposed the minimum requirements available 20 . However, rather than calculating the
costs during the transitional period, our calculations compare the increase in the cost of capital
between existing BIPRU and the CRD IV end point requirements.
37. Pillar 1 applies to all firms, although as discussed before, some firms will not be subject to CRD IV
due to the proposed exercise by the FCA of the discretion in article 95(2) of the Regulation and
will continue to be under existing CRD III capital provisions. The capital requirements for Pillar 2
and the capital buffers are firm specific, therefore we are not including them in the cost estimates.
Table 18: Changes to level of capital requirements
Type of capital GENPRU requirement CRD IV requirement
Core Tier 1/Common Equity Tier 1 2% 4.5%
Tier 1/Additional Tier 1 2% 1.5%
Tier 2 3% 2%
Tier 3 1% -
38. Given that total Pillar 1 requirement remains at 8% but the importance of Common Equity Tier
1 increases, many firms that currently exceed the existing Core Tier 1 requirements will already
meet CRD IV capital requirements. These firms may not have to raise any additional capital.
39. Firms that currently just meet the existing equity capital requirements will need to raise the
additional amount of capital required by CRD IV entirely with equity (see Table 18 for the
differences in composition of capital). Given the differences in the population of firms affected,
we estimate a reasonable range of cost of equity to be 5 to 15%. 21
40. There may be cases where firms adapt to CRD IV capital requirements by retiring existing debt and
substituting it with equity, changing their capital mix but maintaining the existing total levels of capital.
The additional equity to be raised in this scenario is 2.5% of the risk weighted assets (RWAs). 22 In this
case, the incremental cost from CRD IV will be the difference between the cost of raising new equity
minus the after tax cost of the existing debt that will be retired and replaced by equity. We estimate
that a reasonable range for that incremental cost of equity over debt could be 3% to 10%. 23
20 Transitional arrangements are discussed in Chapter 4.
21 The cost of equity was estimated using the CAPM model. The cost of equity could only be estimated for a small number of firms.
However we recognise that these listed firms are not representative of the entire population of firms affected by CRD IV. Therefore we
present a range for the estimated cost of equity. However, it is possible that the cost for some of the firms lies outside this range.
22 This 2.5% is the difference between the CRD IV CET 1 requirement (4.5%) and the current GENPRU Core Tier 1 requirement (2%).
23 As for the cost of equity (see footnote 11), the cost of debt could only be estimated for a small number of firms using the yield to
maturity of corporate bonds. Therefore we present a range for the estimated incremental cost of equity over debt. However, it is
possible that the cost for some of the firms lies outside this range.
68 July 2013
Financial Conduct Authority