Basel II

INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS:

A REVISED FRAMEWORK - COMPREHENSIVE VERSION: JUNE 2006

BASEL COMMITTEE ON BANKING SUPERVISION

Annex 1

The 15% of Tier 1 Limit on Innovative Instruments

1. This Annex is meant to clarify the calculation of the 15% limit on innovative instruments agreed by the Committee in its press release of October 1998.

2. Innovative instruments will be limited to 15% of Tier 1 capital, net of goodwill. To determine the allowable amount of innovative instruments, banks and supervisors should multiply the amount of non-innovative Tier 1 by 17.65%. This number is derived from the proportion of 15% to 85% (i.e. 15%/85% = 17.65%).

3. As an example, take a bank with €75 of common equity, €15 of non-cumulative perpetual preferred stock, €5 of minority interest in the common equity account of a consolidated subsidiary, and €10 of goodwill. The net amount of non-innovative Tier 1 is €75+€15+€5-€10 = €85.

4. The allowable amount of innovative instruments this bank may include in Tier 1 capital is €85 x 17.65% = €15. If the bank issues innovative Tier 1 instruments up to its limit, total Tier 1 will amount to €85 + €15 = €100. The percentage of innovative instruments to total Tier 1 would equal 15%.