The calculation method for the capital requirements
The final capital requirements are derived from a series of calculations which, at a high level, have required
the following steps:
The estimation of loan-life and three-year losses under the base and adverse scenarios – the
BlackRock exercise;
The modelling of the impact of these losses on balance sheets and profit and loss accounts; and
The combination of these two steps to produce a capital requirement for each of the four banks.
The relationship between the first and second steps is essential to understanding why the „raw‟ BlackRock
loan loss estimates do not automatically translate into a capital number – in other words, there is not, nor
could there be, a euro for euro translation of BlackRock‟s estimates into capital. This is because:
Losses take no account of existing or future provisions or future bank earnings;
Losses are calculated over both a three-year and a loan-lifetime basis and have not been
discounted back to a present value; and
The model reports losses in the period in which they are realised.
The link between the BlackRock loan loss assessments and the final capital requirement is made through a
calculation of three-year projected losses, inter-changeably referred to as three-year forecast provisions.
Provisions are the liabilities banks hold to meet losses. The translation of provisions into capital is a
complex process, and although there are long established accounting standards to govern this process, it
ultimately turns on judgements about the likelihood and size of losses. In interpreting the BlackRock loan
loss estimates, the Central Bank has been careful to apply such judgements in a conservative manner, and
have drawn on expert accountants to inform and validate these judgements.
The principal driver of these three-year projected loss calculations in the PCAR is the output of BlackRock‟s
work. These three-year projected losses comprise:
Losses from loans that both default and crystallise in 2011-2013;
Losses from loans that default in 2011-2013 but crystallise after 2013.
The BlackRock-derived three-year projected losses in the stress scenario are significantly more
conservative than the banks' own forecast provisions. In part, they are an early recognition of potential
losses and serve to add conservatism to the PCAR capital calculations.
Once revised forecast three-year projected losses have been calculated based on BlackRock loan-lifetime
loss forecasts, these are combined with forecast operating profit or loss and the losses on asset disposals
under deleveraging plans. Once the forecast capital level is calculated, this is compared to Central Bank
capital requirements and the deficit or surplus is derived.