Maximum Distributable Amount (MDA): CET1 Buffer Quartiles & AT1 Coupon Restrictions

Hard-coded into Basel Framework chapter RBC30.4, EU Capital Requirements Directive Article 141, UK PRA Capital Buffers rules, and U.S. 12 CFR 217.11 ("Eligible Retained Income" payout limits), the Maximum Distributable Amount (MDA) acts as the automatic tripwire conserving Common Equity Tier 1 before a bank ever nears statutory insolvency. Breaching the top of the Basel III CET1 Capital Adequacy Standard Combined Buffer Requirement immediately caps common dividends, share buybacks, AT1 CoCo coupon payments, and staff discretionary bonuses.

How AT1 and Tier 2 Issuance Shortfalls Secretly Elevate the CET1 MDA Trigger#

Investors frequently make the costly analytical error of summing only CET1 requirements (4.5% Pillar 1 + CET1_P2R + CCB + G-SIB + CCyB) when calculating a bank’s MDA trigger. Under Basel CAP10 and EU CRD Article 104a, Pillar 1 requires 1.50% AT1 and 2.00% Tier 2 (plus 18.75% AT1 and 25.00% Tier 2 shares of ECB SREP Pillar 2R).

Whenever an institution under-issues AT1 or Tier 2 relative to those slices, excess CET1 is automatically diverted downward to fill the Tier 1 and Total Capital shortfalls first, rendering that CET1 unavailable to satisfy the Combined Buffer Requirement! Consequently, a 45 bps AT1 shortfall raises the effective CET1 MDA trigger point-for-point by +45 bps, as emphasized in our Basel III Endgame & CET1 cornerstone guide.

The Four CBR Quartiles: 60%, 40%, 20%, and 0% Earnings Retention Multipliers#

Once available buffer-eligible CET1 falls below the Combined Buffer Requirement (CBR = 2.5% CCB + G-SIB/O-SII + CCyB + Systemic Risk Buffer), the maximum fraction of annual/quarterly distributable profits that may be paid out across dividends, buybacks, AT1 coupons, and variable remuneration steps down across four equal quartiles of CBR:

• 4th (Top) Quartile (75% < CET1_Buffer <= 100% of CBR): Up to 60% of earnings may be distributed (minimum 40% retained).
• 3rd Quartile (50% < CET1_Buffer <= 75% of CBR): Up to 40% distributed (60% retained).
• 2nd Quartile (25% < CET1_Buffer <= 50% of CBR): Up to 20% distributed (80% retained).
• 1st (Bottom) Quartile (0% <= CET1_Buffer <= 25% of CBR): 0% distributed (100% of earnings retained; complete ban on dividends, buybacks, bonuses, and AT1 coupons!).

Current-Year Net Loss Trap under EU CRD Art. 141 vs U.S. Four-Quarter Eligible Retained Income#

Notice a critical transatlantic nuance when a bank reports a negative net income in a single stress year while sitting in the 4th (60% payout) quartile:

Under EU CRD V Article 141, MDA equals (Interim + Year-End Unappropriated Profits Net of Tax) * Quartile_Factor. Prior to CRD V clarifications allowing inclusion of interim/year-end profits not yet in CET1, if a Eurozone bank overseen by the European Central Bank suffers a current-year net loss (Profit <= 0) while inside its CBR, MDA = 0 * 0.60 = EUR 0—forcing an immediate 100% AT1 coupon skip even in the top quartile!

Under U.S. 12 CFR 217.11, the Federal Reserve revised Eligible Retained Income (ERI) in March 2020 to equal the greater of (a) four-quarter net income net of distributions, or (b) the average of the preceding four quarters’ net income (ignoring prior distributions), smoothing one-quarter stress losses for institutions like Bank of America and Ally Financial.

Parallel Leverage-MDA (L-MDA) and MREL-MDA (M-MDA) Stacks#

Post-CRD V / CRR II, G-SIBs actually track three simultaneous MDA stacks: Risk-Based Capital MDA (CET1 vs CBR), Leverage-Ratio MDA (L-MDA) against the G-SIB Tier 1 leverage buffer, and MREL-MDA (M-MDA) under EU BRRD II MREL hierarchy rules. Whichever stack leaves the smallest buffer headroom sets the binding distribution ceiling.

Management Capital Targets and Capital Conservation Plan Deadlines (5 Business Days)#

Because equity and AT1 markets violently reprice any bank approaching MDA, boards at BNP Paribas, ANZ Bank, and Bank of Ireland maintain an internal 150 to 250 bps management buffer above MDA; any actual breach mandates submitting a formal Capital Conservation Plan to supervisors within 5 business days across the Basel III Endgame & Capital Ratios topic hub.