IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

Notes to the financial statements continued52. Capital resourcesThe Bank's regulatory capital resources at 31 December 2011 consist of both Tier 1 and Tier 2 capital. Tier 1 capital includesequity (comprising ordinary share capital, share premium, the capital reserve and other eligible reserves), deductions forintangible assets and prudential adjustments. Prudential adjustments include the reversal of movements on available-for-saleand cash flow hedging reserves. Tier 2 capital includes subordinated debt and collective impairment provisions. Specificprudential limits apply to the amount of subordinated debt and collective provisions eligible as regulatory capital. Total capitalis further reduced by supervisory deductions.Regulatory capital resources include €29.3bn contributed by the Minister for Finance as the Group's sole shareholder. Thesecapital contributions have restored the levels of Core Tier 1 regulatory capital following significant losses incurred. As at31 December 2011 the Group reported a Tier 1 capital ratio of 15.1% and a Total capital ratio of 16.3%.On 1 July 2011, the assets and liabilities of INBS, with the exception of certain limited excluded liabilities, were transferred tothe Bank at carrying value, after harmonisation adjustments to give effect to the business combination (notes 1.4 and 2). Onthe date of transfer no cash consideration was paid and settlement was made for the net assets through an increase in theGroup’s shareholders’ funds, increasing Core Tier 1 capital by €0.7bn.The regulatory capital ratios have increased since 31 December 2010 due to a reduction in risk weighted assets during the yearof €11.6bn or 32%. This reduction is primarily related to lending assets where the disposal of US loans in the final quarter ofthe year had a significant impact on total risk weighted assets. Targeted client asset disposals, repayments across loanportfolios, NAMA transfers and additional specific impairment charges further reduced risk weighted assets during the year.The merger with INBS on 1 July 2011 offset some of these reductions as risk weighted assets increased by €1.9bn on transfer.The level of risk weighted assets reflects the Group’s Pillar 1 capital requirements. Following the merger with INBS andsubsequent deleveraging of the balance sheet, the Group has yet to update its Internal Capital Adequacy Assessment Process(‘ICAAP’). Accordingly the Group has yet to determine the appropriate level of capital requirements under Pillar 2.Irish Government exposure, including the promissory notes (note 25), is risk weighted at 0% in line with the requirements ofthe Capital Requirements Directive ('CRD') and guidance from the Central Bank of Ireland.146