Capital adequacy regulations reflect the view of lawmakers regarding how large a capital base a bank must have in relation to the risks the bank takes. On 1 February 2007, new capital adequacy regulations (Basel II) took effect. According to the Capital Adequacy and Large Exposures Act (2006:1371), the capital base must at least correspond to the sum of capital requirements for credit risks, market risks and operative risks. The capital quotient, which is the capital base divided by the capital requirement must therefore be greater than 1. The rules apply for both individual institutions and financial company groups where relevant.
According to Carnegie’s capital policy, the goal is to optimize the capital structure with respect to Tier I and Tier II capital. This policy also specifies that the capital coverage ratio must be at least 1.5 according to Basel II or 12 percent, according to the previous Basel I regulations. Carnegie’s profit-sharing system means that profits are divided equally between shareholders and employees. The requirements for risk capital for operations are assessed through Carnegie’s internal business planning process.
Minimum capital requirement – Pillar I
The legal capital requirement for credit risks, market risks and operative risks is within Pillar I.
Credit risks – Carnegie applies the standard method for calculating credit risk and the complete method for financial collateral.
Operative risks – Carnegie applies the base model, which means that the capital requirement is calculated as 15 percent of the average of the past three years’ earnings.
Market risks – There were relatively few changes in the new regulations, and Carnegie uses the Swedish Financial Supervisory Authority’s standardized model.
Capital assessment and risk management – Pillar II
The Pillar II regulations mean that an institution must have a process for assessing its total capital requirements in relation to its risk profile and a strategy for maintaining the capital level in which the Board of Directors is responsible for determining the institution’s risk tolerance. This process is called Internal Capital Adequacy Assessment Process (ICAAP). All significant risks must be identified, measures and reported in the ICAAP. The assessment must be specially focused on the risks not managed under Pillar I. Certain risks must be covered with capital, meaning that the institution is expected to maintain a larger capital base than the minimum level specified by Pillar I.
Disclosure of information – Pillar III
Information to be published primarily includes more detailed information regarding credit risks, as well as information on the model and data used to calculate the requirements according to Pillar I.