Note 13 - Capital adequacy

SpareBank 1 SMN has used the IRB - Foundation approach for credit risk since January 2007. Use of IRB makes wide ranging demands on the Bank’s organisation, competence, risk models and risk management systems. The effect of the risk weights under IRB is limited by transitional rules laid down in regulations issued by Finanstilsynet (Norway’s FSA). The transitional rules are assumed to apply to the end of 2017.

Subordinated debt ranks behind all other debt. Dated subordinated debt cannot make up more than 50 per cent of tier 1 capital for capital adequacy purposes, while perpetual subordinated debt cannot make up more than 100 per cent of tier 1 capital. Subordinated debt is classified as a liability in the balance sheet and is measured at amortised cost like other long-term debt.

Hybrid capital denotes bonds with a nominal interest rate, but the bank is not obliged to pay interest in a period where dividends are not paid, and neither is the investor subsequently entitled to interest that has not been paid, i.e. interest does not accumulate. Hybrid capital characterised by moderate repayment incentives is approved as an element of tier 1 capital up to limit of 15 per cent of aggregate tier 1 capital. If however hybrid capital does not have a fixed term and is without repayment incentives, it can be included as an element of up to a limit of 35 per cent of aggregate tier 1 capital.

Finanstilsynet (Norway’s FSA) can require hybrid capital to be written down in proportion with equity capital should the bank’s tier 1 capital adequacy fall below 5 per cent or total capital adequacy falls below 8 per cent. Written-down amounts on hybrid capital must be written up before dividends can be paid to shareholders or before equity capital is written up. Hybrid capital is recognised as other long-term debt at amortised cost.

For detailed information regarding subordinated debt and hybrid capital, see note 5 in the bank’s annual report.

As from second quarter 2013 the method of quantifying operational risk was changed from the basic indicator approach to the standardised approach at the parent bank. At Group level the basic indicator approach is still applied to subsidiaries.

Finanstilsynet announced in May 2013 changed capital requirements with effect from 1 July 2013. The new requirements are a common equity tier 1 ratio of 9 per cent, a tier 1 ratio of 10.5 per cent and a total capital ratio of 12.5 per cent.