Meginmál

A financial undertaking’s capital base is capital that absorbs losses in full as soon as they occur. It consists of Tier 1 capital – which in turn consists of common equity Tier 1 capital (CET1) and additional Tier 1 capital (AT1) – as well as Tier 2 capital and deductions.

CET1 capital consists primarily of paid-in share capital or initial capital, stock or initial capital surpluses, retained earnings, and reserve funds. Only capital instruments with an unlimited duration are eligible for designation as AT1 capital. Tier 2 capital includes capital instruments that absorb losses when an undertaking has reached the point of non-viability (PoNV); i.e., subordinated bonds with a limited duration. Deductions include the current year’s losses; approved dividend allocations and, if applicable, foreseeable dividend allocations; goodwill and other intangible assets; calculated tax credits; the book value of own shares held by the financial undertaking in question; and other items.

A financial undertaking’s total risk exposure amount, or risk base, is determined by weighting the book value of individual exposures – i.e., loans and other assets – using so-called risk weights, and then calculating the sum, referred to as risk-weighted assets.

The Act on Financial Undertakings, No. 161/2002 – cf. Regulation (EU) No. 575/2013 (the Capital Requirements Regulation, or CRR) – sets forth various requirements relating to financial undertakings’ capital, including volume, quality, and composition; the ratio of capital to the risk base; buybacks; and leverage.