This paper provides an overview of equity according to the HGB and regulatory capital as defined by Basel III and also its functions.
The concept of equity is used in different contexts. There are no regulatory provisions on capital adequacy for non-banks other than the capital stock. Nonetheless the legislature of credit institutions and insurance companies considered it to be necessary to regulate the amount and adequacy of equity due to the particular risks of the banking and insurance business.
In the German Banking Act (KWG), the definition of liable capital creates a bank-specific equity concept that differs from the one of the balance sheet equity according to the German GAAP (German Commercial Code (HGB).
On 16 December 2010, the Basel Committee on Banking Supervision published its framework "Basel III" in response to the banking crisis, and over the years it has been supplemented and revised.
Table of Contents
1 Introduction
2 Basics
2.1 Definitions
2.1.1 Capital under German GAAP
2.1.2 Regulatory Capital
2.2 Functions
2.2.1 Capital under German GAAP
2.2.2 Regulatory Capital
3 Analysis
3.1 Comparison
3.2 Implications
4 Analysis including deductions
5 Conclusion
Research Objectives and Key Themes
This paper investigates the conceptual differences between equity as defined by the German Commercial Code (HGB) and regulatory capital under the Basel III framework. The primary research objective is to determine whether a synchronization of these two distinct capital concepts is feasible and beneficial for the banking sector, while also evaluating the impact of regulatory deductions on this comparison.
- Comparison of capital definitions under German GAAP versus Basel III standards.
- Functional analysis of equity, focusing on liability, limitation, and risk absorption.
- Examination of the "going-concern" versus "gone-concern" perspectives in capital regulation.
- Analysis of the implications of regulatory deductions and filters on capital adequacy.
- Assessment of the feasibility and economic utility of synchronizing accounting and regulatory equity.
Excerpt from the Book
2.1.1 Capital under German GAAP
Capital under German GAAP includes the funds made available temporary unlimited by the owners of the company. These funds flow to the company from the outside or through the waiver of profit distributions. Equity can be financially seen as the difference between assets and loan capital. Commercial law defines the components of equity for the balance sheet as presented in Art. 266 III HGB. According to Article 266 III HGB, the balance sheet equity includes subscribed capital, capital reserve, retained earnings, profit brought forward/ loss carried forward and net profit/ loss. As a general standard, Art. 272 I 1 HGB defines the subscribed capital as the capital to which the responsibility of the shareholders for the liabilities of the capital company is limited to the creditors. Therefore, the designation "subscribed capital" is not permissible for equity components of individual companies and partnerships with personally liable companies. The liability mass of the company against its creditor obtains all components of the equity capital. For limited partnerships and open trading companies in purpose of Art. 264a of the HGB, companies in which not at least one natural person or an OHG or KG or other persons of a natural person as a personally liable shareholder is involved, there is in Art. 264c II HGB a more precise statement of the equity. Thereafter, capital shares, reserves, profit brought forward/ loss brought forward and net income/ loss are recognized as equity capital.
Despite the rules laid down in the HGB under the section "Third Book of Trading Books" for the presentation of equity capital, there is no clear legal concretization of the concept of equity capital. In its opinion HFA 1/1994, the main committee of the IdW (German institute of public auditors) set cumulative requirements for the recognition of participation rights as equity and therefore providing a practically relevant assessment aid. The equity criteria include the subordination, loss participation, performance-related remuneration and long-term capital lease.
Summary of Chapters
1 Introduction: This chapter introduces the context of capital adequacy and outlines the purpose of comparing HGB equity with Basel III regulatory capital.
2 Basics: This section establishes the definitions and functions of capital under both German GAAP and the Basel III framework.
3 Analysis: This chapter compares the two concepts and discusses the implications of their differences, specifically regarding their functional focus.
4 Analysis including deductions: This chapter investigates how the inclusion of supervisory deductions and filters alters the relationship between the two capital concepts.
5 Conclusion: This chapter summarizes the findings, concluding that synchronization is neither possible nor beneficial due to fundamental differences in purpose and quality.
Keywords
Equity, Regulatory Capital, Basel III, HGB, German GAAP, Going-concern, Gone-concern, Liability Function, Capital Adequacy, Risk Absorption, Credit Risk, Bank Regulation, Capital Deductions, Solvency, Financial Stability.
Frequently Asked Questions
What is the core subject of this research paper?
The paper provides a comparative analysis of equity definitions under the German Commercial Code (HGB) and the regulatory capital requirements established by the Basel III framework.
What are the central themes discussed in the work?
The main themes include capital definitions, the functional roles of equity (such as liability and limitation), the distinction between going-concern and gone-concern principles, and the impact of supervisory deductions.
What is the primary research question?
The research clarifies whether a synchronization of the equity concepts under HGB and Basel III is possible and if such a synchronization would be useful for banking institutions.
Which scientific method is utilized in this paper?
The paper employs a comparative analysis approach, evaluating legal and regulatory definitions alongside functional objectives to derive implications for current banking regulation.
What topics are covered in the main body of the work?
The main body covers the definitions of capital, the distinct functions of equity in a banking context, a comparison of these functions, and an analysis of how capital deductions influence the regulatory view of capital quality.
How would you characterize this work with keywords?
The work is defined by terms such as Equity, Basel III, HGB, Capital Adequacy, Risk Absorption, and Financial Stability.
How does the "going-concern" principle differ from "gone-concern" in this context?
The "going-concern" principle (often associated with HGB equity) aims to absorb ongoing losses to ensure the institution's survival, whereas the "gone-concern" principle (associated with supplementary Basel III capital) is designed to absorb losses during liquidation or insolvency.
Why does the author argue that synchronization is not feasible?
The author argues that synchronization is not possible because HGB equity and regulatory capital serve fundamentally different objectives—the former focuses on balance sheet accounting and ongoing business, while the latter focuses on systematic risk mitigation and bail-out prevention.
What impact do regulatory deductions have on the analysis?
Including deductions brings the quantity of balance sheet equity closer to that of regulatory capital, but the author concludes that the inherent quality of the capital remains insufficient to meet the stringent criteria mandated by Basel III.
- Citation du texte
- Sarah Brockmeyer (Auteur), 2017, Regulatory Capital and Capital under German GAAP. Comparison and Implications, Munich, GRIN Verlag, https://www.grin.com/document/995243
