Regulatory Capital: How Regulators Calculate It

What regulatory capital is for

Regulatory capital is a licensee's own money that absorbs losses, mistakes and the cost of an orderly wind-down before anyone else is affected. Client funds are protected by a different mechanism — safeguarding or segregation; capital exists so that the firm has enough of its own resources to survive a bad year or close down without reaching into other people's money.

Hence the central paradox. The figure an applicant sees in the statute — €350k for an EMI, €125k for a payment institution, S$250k for a Singapore MPI — is almost always the smallest of the numbers the firm will actually have to hold. It sets the entry point, and three mechanisms then push the requirement upwards.

The main EU, US, Hong Kong and Singapore regimes follow the same logic and differ in which variable drives the formula. Four questions separate them: what the entry threshold is, what drives the ongoing requirement, what counts as capital and what is deducted from it.

The table shows that the statutory minimum is never the final number: in every regime it has a variable competitor, and the higher one wins. Thresholds for individual licences, together with timelines and safeguarding, are mapped in the financial licences map.

Initial capital and ongoing own funds

Almost every regime distinguishes two requirements, and confusing them produces the typical application errors.

PSD2 links the two in one sentence: a payment institution's own funds may not fall below the higher of initial capital or the amount calculated under Article 9 (Art. 8(1) PSD2). EMD2 does the same for EMIs, IFR for investment firms and MiCA for CASPs. Initial capital therefore acts as a floor, and the requirement has no ceiling.

A detail that matters for applicants: the formula does not wait for the first annual accounts. A payment institution without a full year of business applies Method A to the fixed overheads in its business plan; an investment firm uses the first-12-month projections filed with its application (Art. 13(3) IFR); a CASP uses the projected fixed overheads for its first 12 months of service provision until it has been providing services for a year (Art. 67(2) MiCA). For an investment firm or CASP, a business plan with a large headcount therefore raises the capital needed at authorisation by itself.

Payment institutions and EMIs: Methods A–D

EU payment capital is tied to one business indicator — overheads, volume or income. The method is set by the national regulator under national law; the regulator may also require up to 20% more or permit up to 20% less after assessing risk management (Art. 9 PSD2). PSD2 itself contains Methods A, B and C; Method D comes from the E-Money Directive and applies only to e-money issuance.

The scaling factor k is 0.5 for an institution that provides only money remittance and 1 for anyone that operates payment accounts, executes payments, issues instruments or acquires transactions. Institutions providing only payment initiation or account information services fall outside Article 9 altogether.

As of September 2026 these rules apply unchanged. The Council and Parliament reached a provisional agreement on PSD3 and the PSR on 27 November 2025 (Council), and Parliament's ECON committee approved the agreed texts on 5 May 2026. Neither act has been adopted: both await the Council's first-reading position, and the plenary vote is indicatively scheduled for 14 December 2026 (PSD3, PSR).

Under the Commission's proposal, PSD3 would repeal the E-Money Directive, bring e-money services into the same directive as payment services and raise initial capital, for example to €400k for e-money services (COM(2023) 366, Art. 5). What the reform changes is covered in PSD3 and the PSR. Until then the national choice of method shapes the requirement more than the choice of country shapes the threshold: the same volume produces a different number under Method A and under Method B, and the applicant does not make that choice.

What it looks like in numbers

An EMI with average outstanding e-money of €30m must hold 2% under Method D, that is €600k — already above the €350k start-up figure. If the same EMI provides payment services unrelated to issuance, the requirement for them is calculated under Method A, B or C and added to Method D, and the regulator may raise or lower the result by up to 20% (Art. 5 EMD2). The average is taken from end-of-day balances over the preceding six months and recalculated on the first day of each month, so growth in balances feeds into the requirement with a lag, but in full. How one member state writes the same two figures into its own statute is shown in the BNB regime for EMIs and payment institutions.

Investment firms: FOR and K-factors

IFR, applicable since 26 June 2021, builds the investment-firm requirement from three competing numbers. Own funds must be at least the highest of them (Art. 11 IFR; Art. 9 IFD), and a firm must notify its regulator as soon as it becomes aware that it no longer meets, or will no longer meet, the requirement (Art. 11(4) IFR). A firm that deals on own account or underwrites and whose consolidated assets reach €15bn applies the CRR instead of the IFR (Art. 1(2) IFR).

Article 15 IFR sets the coefficients. The table shows the five flow-based K-factors that matter most for managers and brokers; firms with trading positions also calculate K-NPR (net position risk), K-CMG (clearing margin), K-TCD (trading counterparty default) and K-CON (concentration).

The coefficients are small, so for a manager without client money the K-factors easily lose to FOR. A small and non-interconnected firm is exempt from K-factors altogether: if assets under management are below €1.2bn, client orders handled are below €100m a day in cash trades and €1bn a day in derivatives, there is no client money, no safekeeping and no trading, clearing or counterparty exposure (DTF, NPR, CMG and TCD all zero), the balance sheet is below €100m and annual revenue is below €30m, the requirement is the higher of the permanent minimum and FOR (Art. 12 IFR).

An illustrative example: a manager without client money, with €2bn of assets under management — above the €1.2bn small-firm threshold — and fixed overheads of €2m a year. The permanent minimum is €75k, K-AUM is €400k and FOR is €500k. The firm must hold €500k, and that amount is driven by fixed overheads. Which of the three permanent minimums applies follows from the MiFID services in the authorisation and from whether the firm may hold client money or client assets, so the scope requested at application sets the floor.

CASPs under MiCA

MiCA gives crypto-asset service providers the same two-part structure that IFR applies to small firms. Prudential safeguards must be at least the higher of two numbers: the permanent minimum capital for the class of services in Annex IV and one quarter of the preceding year's fixed overheads, reviewed annually (Art. 67 MiCA).

The Annex IV classes are cumulative: each includes the services of the one before.

Until a CASP has been providing services for a year, it applies the overheads test to the projected fixed overheads for its first 12 months of service provision, as submitted with its application. A Class 2 exchange with projected fixed overheads of €3m holds one quarter, that is €750k, against a class minimum of €125k.

Form of the safeguard

What sets MiCA apart from the other regimes is the form. The requirement may be met with CET1 capital after full deductions, with an insurance policy covering the EU territories where services are provided or a comparable guarantee, or with a combination (Art. 67(4) MiCA).

The policy must have an initial term of at least one year and a cancellation notice period of at least 90 days, be issued by an authorised third-party insurer and be disclosed on the CASP's website. Procedure and jurisdiction choice are covered in the guide to the MiCA CASP licence.

ART issuers hold at least the highest of €350k, 2% of the average reserve of assets (3% for issuers of significant ARTs) and one quarter of overheads, and the competent authority may raise the reserve-based amount by up to 20% (Arts. 35 and 45(5) MiCA) — see ART and EMT issuance.

Banks under CRR

Bank capital is the only regime in this table where the requirement is tied to risk-weighted exposures. A credit institution needs initial capital of at least €5m; a Member State may authorise particular categories of banks with capital from €1m (Art. 12 CRD). Ratios then apply: CET1 of at least 4.5%, Tier 1 of 6% and total capital of 8% of the total risk exposure amount (Art. 92 CRR). How the ECB assesses capital over the business-plan horizon is covered in the article on the EU banking licence through the ECB.

United States: net capital under Rule 15c3-1

The US regime for broker-dealers is built around liquidity: net capital shows what remains if only assets quickly convertible into cash are left in the calculation. It starts from balance-sheet equity (net worth) and applies strict adjustments: fixed assets, prepaid items, goodwill, unsecured receivables and other assets not readily convertible into cash are deducted, and securities positions are reduced by haircuts. Liabilities under satisfactory subordination agreements meeting Appendix D are added back (17 CFR 240.15c3-1).

The fixed minimum depends on how close the firm gets to client assets.

On top of the minimum, one of two standards applies at the firm's election. The basic standard caps aggregate indebtedness at 1500% of net capital, and at 800% during the first 12 months of business. The alternative standard requires net capital of at least the greater of $250k and 2% of aggregate customer debit items. For a heavily indebted firm, the ratio becomes the binding constraint.

Hong Kong: paid-up and liquid capital under the FRR

The SFC tests two amounts at once. Paid-up share capital is a static entry requirement; liquid capital is an ongoing liquidity test — the amount by which liquid assets exceed ranking liabilities (SFC FAQ on the FRR). Required liquid capital is the higher of a fixed minimum and a variable amount: 5% of the aggregate of adjusted liabilities and the margin required on clients' outstanding futures and options contracts; a Type 3 (leveraged foreign exchange) licensee adds 1.5% of its aggregate gross foreign currency position (s. 2 FRR).

The figures come from the SFC Licensing Handbook as of July 2025. For Type 4 and Type 9 licensees this explains the practical value of the licensing condition not to hold client assets: it removes the paid-up capital requirement and lowers liquid capital to HK$100k. A subordinated loan approved by the SFC is not treated as a ranking liability and therefore works as capital. A licensee that realises it cannot maintain the required financial resources must notify the SFC in writing and cease regulated activity unless the SFC permits otherwise.

Singapore: MAS base capital and the MPI security deposit

Singapore's payment regime adds a second requirement to capital that PSD2 does not have. Base capital is the paid-up ordinary share capital and irredeemable non-cumulative preference share capital plus unappropriated profit, less any interim loss and declared dividends. Security is a separate amount that an MPI must maintain with MAS: a cash deposit, a bank guarantee meeting MAS requirements or another form MAS allows (s. 22 PSA); the amount is set in reg. 13 of the Payment Services Regulations.

For fund managers MAS sets base capital by client type and none for a manager of venture capital funds only (First Schedule, SF(FMR) Regulations). A licensed manager may not let its financial resources fall below its total risk requirement; if they drop below 120% of it, the manager must notify MAS at once, and MAS may restrict its business (regs 6 and 7). MAS guidelines expect financial resources of at least 120% at all times (SFA04-G05, para 3.14).

Security and base capital are cumulative: a bank guarantee covers only the security owed to MAS. The PSA licences themselves are covered in the article on Singapore's PSA payment licences.

What counts as own funds

EU regimes rely on the CRR definitions. Common Equity Tier 1 (CET1) comprises paid-up capital instruments, share premium, retained earnings, accumulated other comprehensive income and other reserves, provided they are available for immediate use to cover losses. An instrument must be paid up, and its purchase may not be funded by the institution itself (Arts. 26 and 28 CRR).

Current-year losses, intangible assets including goodwill, and deferred tax assets that rely on future profitability are deducted from this amount (Art. 36 CRR). For fintech firms the second deduction is especially sensitive: capitalised development of a proprietary platform is an intangible asset. Only prudently valued software whose value would survive resolution or insolvency is excepted, and it is deducted gradually under a prudential amortisation schedule rather than in full (Delegated Regulation (EU) 2020/2176). MiCA requires the deductions in full, without threshold exemptions.

Payment institutions are subject to proportions: at least 75% of Tier 1 must be CET1, and Tier 2 may not exceed one third of Tier 1 (Art. 4(46) PSD2). EMD2 does not repeat them: an EMI's own funds are the banking-directive items to which Art. 5(1) EMD2 refers, now read as references to the CRR and CRD (Art. 163 CRD). Within a group, the same items may not be counted twice — for a parent bank and for its payment-institution subsidiary.

Where the money comes from: equity, subordinated loans, guarantees

The main source is shareholders' contributions to share capital and share premium. This meets initial capital without qualification. Who contributes it and with what money is assessed by the regulator when it vets the owners: the criteria are the proposed acquirer's reputation and financial soundness and whether there are reasonable grounds to suspect money laundering in connection with the acquisition (Art. 23 CRD); how that test runs across sectors is set out in qualifying holdings and fit and proper. What happens to capital when the owner changes is covered in change of control.

A subordinated loan is the second instrument, and each of the three systems counts it only in a prescribed form.

The EU conditions are set by Arts. 63, 64 and 77 CRR: the counted amount amortises straight-line over the final five years, and a loan that the lender can call early does not count as capital. Tier 2 is capped: for a payment institution at one third of Tier 1 (Art. 4(46) PSD2); for an investment firm by the requirement that CET1 cover at least 56% and CET1 plus AT1 at least 75% of the own funds requirement (Art. 9 IFR). A CASP cannot use a subordinated loan at all: MiCA accepts only CET1, insurance or a comparable guarantee (Art. 67(4) MiCA).

A guarantee from a parent company or a bank is not own funds: capital must be paid up and sit on the licensee's balance sheet. The exceptions are narrow and named in the legislation. MiCA allows an insurance policy or a comparable guarantee instead of CET1 capital. MAS accepts a bank guarantee as an MPI's security — but that is collateral that comes on top of base capital and does not replace it.

An applicant from a sanctioned or high-risk jurisdiction

The formulas are indifferent to who owns the applicant: they run on overheads, volume, outstanding e-money and client assets. The owner and the origin of its money are tested in the adjacent limb of the same file, the assessment of the proposed acquirer, and that test turns the capital question from how much into by what route. The authority confirms that the initial capital is actually held before it grants the licence (Art. 5(1)(c) PSD2), so an amount that cannot be evidenced does not close the requirement; the money has to be paid in, be traceable to a documented source, and not be caught on the way by restrictive measures that limit which institutions may hold it or accept a deposit of that size. What the receiving bank asks is set out in source of funds, and the perimeter of the measures in the sanctions route map.

Typical applicant errors

The errors repeat from regime to regime because they stem from one confusion — between the threshold and the requirement. Five are the most common, and each is caught by a specific provision.

The common conclusion: capital is planned as a function of the business plan over its whole horizon; a one-off amount on the account at filing does not solve the problem. The roles and reporting in which this calculation lives after authorisation are described in the compliance stack.