What exactly is a capital conservation range according to Basel III? It should be related (possibly equivalent to) a capital conservation buffer or CCoB, which is the amount of common equity tier 1 or CET1 capital a bank has, relative to its risk-weighted assets or RWA. Assuming a bank has a CET1 ratio to its RWA at 5.9 percent and a regulatory minimum CET1 ratio is 4.5 percent, what is its CET1 ratio in excess of the minimum requirement as a percentage of the conservation range?

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    $\begingroup$ Buffer vs range: the buffer is the requirement to hold 2.5% of a bank's risk-weighted assets in capital in addition to the minimum capital requirements. What happens if losses erode this buffer (i.e. suddenly the bank has less than 2.5%) ? Then the bank is in Capital Preservation Mode (or range) and is restricted from making dividend payments and engaging in share buybacks until they can rebuild the buffer to its full 2.5% size. $\endgroup$
    – nbbo2
    Apr 2 at 15:28
  • $\begingroup$ @nbbo2 Okay, thank you. So "conservation range" essentially means a bank already has less than the 2.5 percent, right? That means if it's "within the range", the capital-conservation bands kick in, saying how much less dividends a bank can pay out depending on how much CCoB has been eroded? $\endgroup$ Apr 2 at 15:34
  • $\begingroup$ Yes. It seems to me, in your example the range is 4.5% to 7%. If you only have 5.9% you are in the range (which is bad news). The buffer is at 5.9-4.5 = 1.4 instead of the required 2.5. That's 1.4/2.5 or only 56% of what it should be. So you can't pay dividends, to help conserve capital. $\endgroup$
    – nbbo2
    Apr 2 at 15:39
  • $\begingroup$ @nbbo2 I think you can pay out dividends, but not 100 percent. I think there are bands that kick in once you are below the required CCoB (or 2.5 percent). You do not have to retain all profit, unless you have a zero buffer. For example, the 1.4 percent CCoB (or 1.1 percentage points less than required) corresponds to about 60 percent earnings retention. That means you should be able to pay out a maximum of 40 percent of earnings. $\endgroup$ Apr 2 at 16:08
  • $\begingroup$ OK, thanks. I knew I was not up to all the details. $\endgroup$
    – nbbo2
    Apr 2 at 19:00


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