A tier 2 bond loses eligibility a little every day for five years before it matures, and once the tier 2 slot runs short the gap is filled with common equity that would otherwise sit in the buffer.
A tier 2 instrument in the final five years before its contractual maturity counts for its nominal amount times the days remaining to maturity, divided by the days in that five-year period: a daily straight line under Article 64 of the CRR. An illustrative 400 million bond maturing on 31 March 2029 counts 179.8 million at the end of 2026, with 821 of 1,826 days left. If that leaves the tier 2 slot short, common equity fills the gap, and here headroom to the combined buffer falls by 19.5 basis points.
Worked in full in Financial Regulation by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The rule exists because a bond close to maturity is about to leave, and capital that is about to leave absorbs fewer losses. It is mechanical and easy to model, yet it is a frequent source of surprise in capital plans, because the cost does not show in the tier 2 line. It shows in the CET1 that is quietly moved out of the buffer to cover it.
| Item | Value |
|---|---|
| Risk-weighted assets | 20,000 |
| CET1 capital (13.0 per cent) | 2,600 |
| Additional tier 1 | 400.0 |
| Bond A, tier 2, matures 30 June 2033 | 300.0 |
| Bond B, tier 2, matures 31 March 2029 | 400.0 |
| Pillar 2 requirement (P2R) | 2.5% |
| Combined buffer requirement | 3.0% |
Eligible amount = nominal × days remaining to maturity ÷ days in the final five-year period
In Excel: =Nominal*(Maturity-ReportDate)/(Maturity-EDATE(Maturity,-60)), applied only when the report date falls inside the period.
Step 1: which bonds are amortising. Bond B's final five years started on 31 March 2024. Bond A's start on 30 June 2028, so at the end of 2026 it still counts in full.
Step 2: Bond B's eligible amount. The period from 31 March 2024 to 31 March 2029 has 1,826 days. At 31 December 2026, 821 remain. 400.0 × 821 ÷ 1,826 = 179.8 million. The bond loses 0.2191 million a day, about 19.9 million a quarter and 80.0 million a year. Eligible tier 2 is 479.8 against 700.0 of nominal, and the total capital ratio is 17.40 per cent rather than the 18.50 per cent the nominal amounts suggest.
Step 3: the slots. Each layer of the requirement has to be met by capital of at least that quality. P2R is met at least 56.25 per cent with CET1 and 75 per cent with tier 1.
| Requirement | % of RWA | EUR million |
|---|---|---|
| CET1: 4.5% + 56.25% of P2R | 5.90625% | 1,181.25 |
| Tier 1: 6% + 75% of P2R | 7.8750% | 1,575.00 |
| Total capital: 8% + P2R | 10.500% | 2,100.0 |
| Tier 2 slot (total less tier 1) | 2.625% | 525.0 |
Step 4: who fills the tier 2 slot. The additional tier 1 slot is 393.75, so 6.25 of AT1 is surplus and counts towards total capital. Tier 2 plus that surplus is 486.1 against a slot of 525.0. The CET1 needed for the total capital requirement is 2,100.0 − 400.0 − 479.8 = 1,220.2, more than the 1,181.25 CET1 requirement itself. The difference, 38.9 million of CET1, is covering tier 2.
Step 5: the headroom. CET1 available for the buffer is 2,600 − 1,220.15 = 1,379.85, or 6.899 per cent of RWA. Less the 3.0 per cent combined buffer, headroom to the MDA trigger is 3.899 per cent. With both bonds counted at nominal it would be 4.094 per cent. The 19.5 basis point gap is the amortisation.
| Date | Bond B eligible | Total tier 2 eligible | CET1 filling tier 2 | Headroom |
|---|---|---|---|---|
| 31 Mar 2024 | 400.0 | 700.0 | 0.0 | 4.094% |
| 31 Dec 2025 | 259.8 | 559.8 | 0.0 | 4.094% |
| 31 Dec 2026 | 179.8 | 479.8 | 38.9 | 3.899% |
| 31 Dec 2027 | 99.9 | 399.9 | 118.9 | 3.499% |
| 31 Dec 2028 | 19.7 | 289.5 | 229.3 | 2.947% |
| 31 Mar 2029 | 0.0 | 255.0 | 263.8 | 2.775% |
The bank needed 518.75 of tier 2 to keep CET1 out of the slot, which means Bond B had to count at least 218.75. That line was crossed on 6 July 2026, 999 days before maturity. From then on every day costs CET1 headroom. By 2028 the effect accelerates, because Bond A enters its own final five years on 30 June 2028 and starts amortising too. At maturity the bank has lost 131.9 basis points of headroom without a single loss or a single new loan.
The refinancing date is a capital date. A replacement tier 2 issue is usually planned around the call or maturity of the old bond. On these figures the planning date was mid-2026, more than two and a half years earlier, when the amortising bond stopped covering the slot.
Amortise each tier 2 instrument daily over the five years before maturity, then rebuild the requirement slot by slot. Here Bond B counts 179.8 of its 400.0, the slot is short by 38.9, and that CET1 comes out of the buffer: 19.5 basis points now, 131.9 by maturity. The capital stack in the free workbooks for this case fills the same three compartments and shows which constraint binds.
The contractual maturity date. The final five-year period runs back from maturity, and a call date does not start or accelerate the amortisation. An illustrative bond maturing on 31 March 2029 starts amortising on 31 March 2024 whatever its call schedule, and loses 0.2191 million of eligible capital a day on a 400 million nominal, about 19.9 million a quarter.
Daily. The CRR multiplies the nominal on the first day of the final five years, divided by the days in that period, by the days of maturity remaining. Stepping it down by 20 per cent for each whole year remaining overstates capital between anniversaries: with 821 days left, rounding up to three years counts 240.0 instead of 179.8, 60.2 too much.
Because a bank must meet its total capital requirement before any CET1 counts towards the combined buffer. When eligible tier 2, plus any additional tier 1 above its own slot, falls below the tier 2 slot, CET1 fills the gap and leaves the buffer. Here 38.9 million of CET1 does that at the end of 2026, cutting headroom by 19.5 basis points, and 263.8 million by the bond's maturity.
This article is one calculation from Financial Regulation. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: regulation, compliance and banking → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.