Islamic Capital Markets and Products

CHAPTER 9Eligible Capital and Capital Instruments

By Brandon Davies

This chapter will focus on the structure of capital in banks under the Basel Committee's Basel III regime as amended to date. The implications of Basel III for the capital of Islamic banks will also be considered. Islamic banks may not issue interest-bearing debt instruments, or preferred shares, but there are forms of sukuk which may take the place of these. Capital instruments that Islamic banks may issue to meet the Basel III requirements are considered in more detail in Chapter 14.

However, to place into context the new capital regime we have below given an introduction to the reasons behind what amount to very significant changes to the previous regime.

It is important to make the point that the full extent of the changes to the regulatory capital requirements is not yet complete. In particular, this is the case for a new regime for the capital of banks in resolution, the so-called Total Loss Absorbing Capacity (TLAC). Moreover, changes to risk computations and resulting capital requirements for the trading book, known as the Fundamental Review of the Trading Book (FRTB), are not yet finalised.

An additional point made in this introduction is the importance of accounting standards in the computation of capital, as reported under International Financial Reporting Standards (IFRS). Major changes to the computation of banks’ published capital and reserves will result from the implementation of the new IFRS9 ...