6Capital and Netting

In this chapter we examine the requirement for prudentially regulated financial institutions to maintain a prescribed level of regulatory capital – first providing a definition of the term, before examining the relevant regulations themselves and the impact that this requirement will have, from both a legal data and more general commercial perspective.

The netting section begins by providing an overview of the different types of netting in use, before focusing in much greater detail on close‐out netting and the legal data requirements involved in this process. It also covers the requirement to have the benefit of appropriate legal opinions on file to support close‐out netting, and the different forms such legal opinions can take.

What is Regulatory Capital?

Banks are vital to the modern economy. After all, they provide major sources of credit, meaning they control the availability of money for consumers and businesses who, in turn, use that money to participate in the economy. This is a double‐edged sword, as banks also pose a systemic risk to the wider economy; risks that have the potential to propagate globally and have major repercussions for economies around the world, as was evidenced by the Financial Crisis. The interconnectivity of financial institutions in the financial system means that the failure of one major bank can have a ‘domino effect’ causing the failure of other major financial institutions. As a means of mitigating these systemic risks, ...

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