This annex provides further details of the questions referred to in the main text.

Terminology and general definitions

The following terms are used within the report:

Cost – the cost to the issuing bank of raising money via the specified form of funding.

Demand factor – a factor that influences a bank’s need or desire for a particular volume of funding or capital, holding constant any supply factors.^{footnote [1]} These factors include price terms, such as the interest rate paid, spread charged or yield; non-price terms or market liquidity; and regulatory factors.

Supply factors – these typically include market access (ie whether markets are open or shut to issuers of debt) and investor demand in the case of wholesale debt finance or capital, as well as changing supply, unrelated to changes in prices, on the part of depositors for retail deposits.

Section 1 – Funding

This section refers to the following broad funding types:

• Total funding – all wholesale and retail funding.
• Retail funding – funding raised by banks in the form of deposits from households and private non‑financial corporations (PNFCs).
• Other funding – funding in wholesale public debt capital markets, private placement markets and directly from central bank operations.

It also refers to the following funding instruments:

Short-term funding

• Certificate of deposit – a time deposit, with maturity of less than 12 months, in the form of a promissory note that is issued by banks and can be traded in secondary markets.
• Commercial paper – a discount instrument security with maturity of less than 12 months, which can be traded in secondary markets.
• Short‑term repo/securities lending – funding raised via the sale and subsequent repurchase of a security or similar transaction, with a term of less than 12 months.
• Unsecured borrowing including deposits from other financial companies (OFCs) and interbank deposits – funding raised via deposits placed by other financial corporations and other banks.

Long-term funding

• Long‑term repo/securities lending – funding raised via the sale and subsequent repurchase of a security or similar transaction, with a term of greater than 12 months.
• Structured products: structured notes – debt instruments based on derivatives which pay coupons and a final redemption value linked to asset prices.
• Structured products: other – other structured debt instruments whose payout or structure is related to another market indicator or asset price.
• Senior unsecured debt – debt securities issued by banks that pay a coupon, along with a final redemption payment.pnfc
• Asset‑backed securities – debt securities issued by special purpose vehicles, but ultimately ‘sponsored’ by banks (or other asset originators), that pay a coupon along with a final redemption payment. The security is backed by, and cash flows come from, assets such as residential mortgage loans, commercial mortgage loans or credit card receivables.
• Covered bonds – debt securities issued by banks that pay a coupon, along with a final redemption payment. The security has an associated ‘cover pool’ of assets, such that the investor has dual recourse to both the issuer and the ‘cover pool’.

Section 2 – Capital

The following terms are used within this section:

• Total capital – the total level of capital.
• Cost of capital – the average cost of capital to the issuing institution.
• Common equity Tier 1 capital – paid‑up share capital/common stock (issued and fully paid ordinary shares/common stock) and disclosed reserves created or increased by appropriations of retained earnings or other surplus (for example, share premiums, retained profit, general reserves and legal reserves).
• Additional Tier 1 capital – going concern capital that is not included in common equity Tier 1 (for example, perpetual non‑cumulative preference shares).
• Tier 2 capital – subordinated instruments that meet the criteria for Tier 2 (and not Tier 1) capital and certain loan loss provision.

This section refers to how various factors might affect a bank’s actual and desired level of capital. These factors should be interpreted as follows:

Direct effects

• Direct effects of profits, losses, deductions and charges (UK-specific/non-UK specific) – how the balance of profits, losses, deductions and charges have affected the total level of capital. Deductions are defined as regulatory changes to the definition of capital: for example if a regulator defined capital more narrowly, this would reduce a bank’s total capital. The contribution of such factors is identified within the United Kingdom and outside the United Kingdom.

Factors that have affected banks’ demand for capital

• Changing economic outlook – if a bank expects the economic outlook to deteriorate then it might want to hold a higher level of total capital.
• Strategic decisions to increase/reduce risk – strategic decisions to change the size of a bank’s capital buffer above the regulatory requirement, eg if a bank decided to hold a larger capital buffer it would require more capital.
• Regulatory drivers – if regulatory authorities increased required capital levels then a bank may need to raise more capital.
• Changes in size of balance sheet – if a bank expects the size of its balance sheet to increase then it might want to hold a higher level of capital.
• Changes in riskiness of assets – this captures changes to the riskiness of assets, or their risk weighting. If regulatory risk weightings were increased then a bank might need to increase its level of capital. Additionally if a bank chose to hold riskier assets, its demand for capital might increase.

Supply factors

• Market conditions – covers the effects of market access and investor demand.
• Investor pressure to change volume of capital – changes due to investor concerns about the ability of the respondent to absorb losses.

The section also refers to how various factors might affect the composition of a bank’s capital. This question asks about whether economic conditions, strategic decisions to change the mix of capital, regulatory drivers, market conditions or investor demand have contributed positively or negatively to the proportion of total capital accounted for by additional Tier 1 and Tier 2 capital, as opposed to common equity Tier 1 capital.

Section 3 — Transfer pricing

The following terms are used within this section:

• Average absolute cost – this can be interpreted as the cost to a bank of funding the stock of loans.
• Marginal absolute cost – this can be interpreted as the cost of funding the flow of new loans, rather than the average cost of funding the stock of existing loans. This is sometimes referred to as the ‘transfer price’.
• Swaps or reference rates – the transfer price can typically be broken down into the spreads on selected debt instruments, the reference rates to which those spreads are quoted, and the cost of swapping fixed and floating-rate payments. This question identifies the contribution to the transfer price from the latter two.