Annex # 7: Minority Interest Illustrative Example
| No: 341000015689 | Date(g): 19/12/2012 | Date(h): 6/2/1434 | Status: In-Force |
This Annex illustrates the treatment of minority interest and other capital issued out of subsidiaries to third parties, which is set out in paragraphs 62 to 64.
Illustrative example
A banking group consists of two legal entities that are both banks. Bank P is the parent and Bank S is the subsidiary and their unconsolidated balance sheets are set out below.
| Bank P balance sheet | Bank S balance sheet | ||
| Assets | Assets | ||
| Loans to customers | 100 | Loans to customers | 150 |
| Investment in CET1 of Bank S | 7 | ||
| Investment in the AT1 of Bank S | 4 | ||
| Investment in the T2 of Bank S | 2 | ||
| Liabilities and equity | Liabilities and equity | ||
| Depositors | 70 | Depositors | 127 |
| Tier 2 | 10 | Tier 2 | 8 |
| Additional Tier 1 | 7 | Additional Tier 1 | 5 |
| Common equity | 26 | Common equity | 10 |
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 (Bank P) | Amount issued to third parties | Total | |
| Common Equity Tier 1 (CET1) | 7 | 3 | 10 |
| Additional Tier 1 (AT1) | 4 | 1 | 5 |
| Tier 1 (T1) | 11 | 4 | 15 |
| Tier 2 (T2) | 2 | 6 | 8 |
| Total capital (TC) | 13 | 10 | 23 |
The consolidated balance sheet of the banking group is set out below:
| Consolidated balance sheet | |
| Assets | |
| Loans to customers | 250 |
| Liabilities and equity | |
| Depositors | 197 |
| Tier 2 issued by subsidiary to third parties | 6 |
| Tier 2 issued by parent | 10 |
| Additional Tier 1 issued by subsidiary to third parties | 1 |
| Additional Tier 1 issued by parent | 7 |
| Common equity issued by subsidiary to third parties (ie minority interest) | 3 |
| Common equity issued by parent | 26 |
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 | ||
| Minimum plus capital conservation buffer | Surplus | |
| CET1 | 7.0 (= 7.0% of 100) | 3.0 (=10 – 7.0) |
| T1 | 8.5 (= 8.5% of 100) | 6.5 (=10 + 5 – 8.5) |
| TC | 10.5 (= 10.5% of 100) | 12.5 (=10 + 5 + 8 – 10.5) |
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 62 to 65:
| Bank S: amount of capital issued to third parties included in consolidated capital | |||||
| Total amount issued | Amount issued t third parties | Surplus | Surplus attributable to third parties (ie amount excluded from Consolidated capital) | Amount included in consolidated capital | |
| (a) | (b) | (c) | (d) =(c) * (b)/(a) | (e) = (b) – (d) | |
| CET1 | 10 | 3 | 3.0 | 0.90 | 2.10 |
| T1 | 15 | 4 | 6.5 | 1.73 | 2.27 |
| TC | 23 | 10 | 12.5 | 5.43 | 4.57 |
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.
| 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 consolidated capital | Total amount issued by parent and subsidiary to be included in consolidated capital | |
| CET1 | 26 | 2.10 | 28.10 |
| AT1 | 7 | 0.17 | 7.17 |
| T1 | 33 | 2.27 | 35.27 |
| T2 | 10 | 2.30 | 12.30 |
| TC | 43 | 4.57 | 45.57 |