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Annex 4 Summary: Capital and Reserves Overview of National Rules

Core Content

This document provides an overview of the capital and reserves definitions used in various European countries for financial institutions, particularly banks and credit institutions. The information is structured by country, detailing the components of capital and reserves, along with the application of prudential filters and regulatory requirements.

Main Features of Capital and Reserves

Capital Definitions

• Austria: Paid-up capital varies by legal form (e.g., partnerships, stock corporations, cooperatives, etc.). For credit institutions, participation capital is considered without obligation of subsequent dividend payments.
• Belgium: Paid-up capital and share premium (excluding preferential shares). Non-cumulative undated preferential shares may be included.
• Cyprus: Issued and fully paid-up share capital, non-cumulative and non-redeemable preference shares, and share premium accounts.
• Czech Republic: Paid-up capital stock and share premium (cumulative preferential shares not relevant). Capital includes statutory reserves, undistributed after-tax profits, and net income from the approval process.
• Denmark: Paid-up share capital, guarantee capital, and additional paid-in capital. Savings banks include guarantee capital as part of paid-up capital.
• Estonia: Paid-in share capital and share premium (excluding preferred shares).
• Finland: Share capital, funds in share issue accounts, and premium funds. Cooperatives and savings banks have specific capital structures. Capital loans are also considered part of original own funds.
• France: Share capital includes sums equivalent to it, such as permanent endowments or "parts sociales." Reserves include revaluation reserves, share premiums, and retained earnings.
• Germany: Eligible capital includes paid-up ordinary share capital, endowment capital, and other forms depending on the legal structure. Reserves are defined based on IFRS and Basel/CEBS prudential filters.
• Greece: For non-IFRS banks, capital includes equity and share premium accounts. For IFRS banks, it includes equity and revaluation reserves if certain conditions are met.
• Hungary: Core capital includes subscribed capital, capital reserve, general reserves, and retained earnings. Negative components include unpaid capital and intangible assets.
• Ireland: Equity capital includes paid-up ordinary shares and perpetual non-cumulative preference shares. Share premium accounts and minority interests in subsidiaries are also included.
• Italy: Paid-up capital includes shares with special dividend rights, excluding those that are perpetual and non-cumulative.
• Latvia: Paid-up share capital and share premium, excluding cumulative preferential shares.
• Lithuania: Preferential shares must be non-cumulative, non-redeemable, and perpetual to qualify for Tier 1 capital. Mandatory reserves are required to be formed from net profit.
• Luxembourg: Subscribed capital (excluding non-voting shares) and share premium accounts.
• Malta: Ordinary shares, share premium accounts, retained profits, and other reserves including revaluation reserves.
• Netherlands: Paid-up capital excludes cumulative preference shares. Reserves include statutory reserves and retained earnings.
• Norway: Paid-up share capital, premium accounts, and PCC (Primary Capital Certificate) capital. Reserves also include savings banks' fund and dividend equalisation fund.
• Poland: Capital varies by institution type (state bank, public limited company, cooperative bank, foreign branch). Includes equity, capital surplus, and reserve funds.
• Portugal: Paid-up capital includes foundational funds and "cuotas participativas" of savings banks. Share premium accounts are included.
• Slovakia: Paid-up registered share capital and share premium accounts. Reserves include capital surplus and retained earnings.
• Slovenia: Paid-up subscribed capital and share premium accounts for domestic banks. For foreign branches, endowment capital is used. Reserves include profit brought forward and statutory reserves.
• Spain: Capital includes fully paid-up ordinary capital, foundational funds, and contributions to corporate funds. Non-cumulative, perpetual shares are included.
• Sweden: Equity includes paid-up share capital, share premium, and shareholders' contributions.
• United Kingdom: Ordinary shares and preference shares (non-cumulative, no voting rights). Capital must be fully paid-up, with stricter conditions under IFRS.

Reserves Overview

• Reserves generally refer to amounts designated as such in the balance sheet, including retained earnings, share premiums, and statutory reserves.
• Exclusions from reserves include revaluation reserves, unless specified otherwise.
• Prudential Filters are applied to reserves under IFRS, including:
  • Deducting net unrealised gains on AFS equities and debt securities.
  • Deducting unrealised gains on investment property, cash flow hedges, and liabilities.
  • Adding back net unrealised losses on AFS instruments and cash flow hedges.
  • Excluding the equity component of compound financial instruments.
  • Including 50% of accumulated post-employment defined benefit plan deficits.

Key Information

• Tier 1 Capital: Includes equity capital, share premium accounts, and reserves that are not subject to distribution. Some countries also include guarantees and statutory reserves.
• Tier 2 Capital: May include items such as cumulative preference shares, revaluation reserves, and restricted reserves, depending on the country's legal framework.
• Regulatory Bodies: Each country has its own supervisory authority (e.g., Kredittilsynet in Norway, Banco de Portugal in Portugal) that may require prior approval for certain capital components.
• IFRS Application: Most countries do not allow the use of IFRS for capital adequacy calculations until prudential filters are implemented.
• Special Cases:
  • PCC (Primary Capital Certificate) in Norway is treated similarly to shares and is part of Tier 1 capital.
  • Savings banks in several countries have specific capital and reserve structures, including liability reserves and dividend equalisation funds.
  • Cooperatives and credit co-operatives have unique capital and reserve definitions.
• Restricted vs. Non-restricted Reserves:
  • Restricted reserves include retained earnings and profits brought forward.
  • Non-restricted reserves are those not subject to distribution or legal restrictions.

Summary of Key Differences

Conclusion

The document outlines the varying definitions of capital and reserves across different European countries, emphasizing the importance of legal structures, prudential filters, and regulatory requirements. Each country's approach reflects its unique financial and legal framework, with most applying IFRS-based adjustments for capital adequacy. The inclusion of reserves in capital is subject to specific conditions, such as being non-restricted, perpetual, and not subject to future redemption or distribution.