# Regulatory Capital: How Regulators Calculate It

> Why the statutory capital minimum is the smallest number: Methods A–D for payment institutions and EMIs, IFR FOR and K-factors, MiCA for CASPs, SEC net capital, SFC FRR and MAS base capital.

Author: Gordey Bolotko — Partner, Corporate & Commercial (https://wiki.private.law/en/authors/bolotko)
Last modified: 2026-09-23T00:00:00.000Z
Canonical: https://wiki.private.law/en/regulatory-capital
Publisher: wiki.private.law (https://wiki.private.law)
Version: a458bc4d38e16f827419e6cdff62777f50e32eb99189e86251d461f40ff29aa3
Cite as: Regulatory Capital: How Regulators Calculate It. wiki.private.law. https://wiki.private.law/en/regulatory-capital. Version a458bc4d38e16f827419e6cdff62777f50e32eb99189e86251d461f40ff29aa3.
Topics: banking
Jurisdictions: eu, usa, hong-kong, singapore
Functional tags: license
Product tags: compliance, license-emi-eu, license-vasp-mica, license-mpi, investment, bank
Semantic tags: license, compliance, license-emi-eu, license-vasp-mica, license-mpi, investment, bank

---

## 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.

**Ongoing formula**

The regulator compares the starting minimum with an amount that grows with the business: payment volume, outstanding e-money, client assets or fixed overheads. The requirement is the higher of the two, and for several formulas a new firm uses the projection from its business plan from the outset.

**Deductions**

Current-year losses, intangible assets and deferred tax assets are deducted; US net capital also strips out illiquid assets and haircuts securities positions. A paid-in €350k after a year of development and a capitalised platform becomes a noticeably smaller amount.

**Buffer**

Regulators expect capital above the minimum. Singapore's MAS says so explicitly: as a general rule of thumb, a payment licensee's base capital should cover at least 6 to 12 months of operating expenses ([PS-G01, para 3.1.5](https://www.mas.gov.sg/-/media/mas-media-library/regulation/guidelines/pso/ps-g01-guidelines-on-licensing-for-payment-service-providers/guidelines-on-licensing-for-payment-service-providers-updated-8-oct-2025.pdf)).

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.

| Regime | Entry threshold | Ongoing requirement | What counts | What is deducted |
| --- | --- | --- | --- | --- |
| Payment institution, EU (PSD2) | €20k / €50k / €125k by service | Higher of threshold and Method A, B or C | Own funds under CRR: at least 75% of Tier 1 in CET1, Tier 2 no more than one third of Tier 1 | Current-year loss, intangibles, deferred tax assets relying on future profit |
| EMI, EU (EMD2) | €350k | Method D (2% of average outstanding e-money) plus A, B or C for other payment services | Own funds items to which Art. 5(1) EMD2 refers (banking definition, now CRR), without PSD2's 75% / one-third proportions | The same CRR deductions |
| Investment firm, EU (IFR/IFD) | €75k / €150k / €750k | Highest of threshold, FOR and K-factors; for small firms, of threshold and FOR | CET1, AT1 and Tier 2 under CRR; CET1 at least 56% and CET1 plus AT1 at least 75% of the requirement | CRR deductions; software on the prudential amortisation schedule |
| CASP, EU (MiCA) | €50k / €125k / €150k by class | Higher of threshold and one quarter of fixed overheads | CET1 after deductions, an insurance policy or a combination | CRR deductions in full, without threshold exemptions |
| Bank, EU (CRD/CRR) | €5m; from €1m for certain categories | CET1 4.5%, Tier 1 capital 6%, total capital 8% of risk-weighted exposures | CET1, AT1 and Tier 2 | CRR deductions, plus buffers required above the ratios |
| Broker-dealer, US (Rule 15c3-1) | From $5k to $250k by business model | Minimum plus 1500% aggregate indebtedness limit or 2% of customer debit items | Net worth less non-allowable assets and haircuts, plus approved subordinated debt | Assets not readily convertible into cash; haircuts on securities |
| SFC licensee, Hong Kong (FRR) | Types 1, 4, 9: paid-up capital of nil, HK$5m or HK$10m; liquid capital from HK$100k | Higher of the minimum and 5% of adjusted liabilities plus client futures and options margin | Liquid assets less ranking liabilities; an approved subordinated loan is not a ranking liability | Assets outside the definition of liquid assets |
| MAS payment licensee, Singapore (PSA) | SPI S$100k, MPI S$250k | Base capital at all times; MPI also posts security of S$100k or S$200k | Paid-up capital and unappropriated profit less losses | Interim losses and declared dividends |
| MAS fund manager (CMS) | S$250k / S$500k / S$1m | Financial resources not below the total risk requirement; MAS is notified below 120% | Financial resources under SFA rules | Adjustments under the SFA financial-resources rules |

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](https://wiki.private.law/en/fintech-license-map).

## Initial capital and ongoing own funds

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

**Initial capital**

The amount paid in by the time the licence is granted. In most regimes it may consist only of the highest-quality items: paid-up shares, share premium, retained earnings and reserves; an investment firm follows the IFR own-funds composition ([Art. 11 IFD](https://eur-lex.europa.eu/eli/dir/2019/2034/oj)). It sets a floor below which capital may never fall.

**Own funds**

The measure the licensee maintains at all times and recalculates under the regime's formula. It grows with overheads, volume, outstanding e-money or client assets and is reduced by deductions.

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](https://eur-lex.europa.eu/eli/dir/2015/2366/oj)). 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](https://eur-lex.europa.eu/eli/reg/2019/2033/oj)); 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](https://eur-lex.europa.eu/eli/reg/2023/1114/oj)). For an investment firm or CASP, a business plan with a large headcount therefore raises the capital needed at authorisation by itself.

> ⚠️ The statutory minimum only answers with what amount an application can be filed. A licensee whose own funds fall below the formula breaches a prudential requirement even if its paid-in capital is formally above the statutory threshold.

## 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](https://eur-lex.europa.eu/eli/dir/2015/2366/oj)). PSD2 itself contains Methods A, B and C; Method D comes from the E-Money Directive and applies only to e-money issuance.

| Method | Basis | Formula | Feature |
| --- | --- | --- | --- |
| A | Fixed overheads of the preceding year | 10% of fixed overheads | Without a full year of business, overheads from the business plan |
| B | Payment volume: one twelfth of annual transactions | 4% up to €5m, 2.5% to €10m, 1% to €100m, 0.5% to €250m, 0.25% above; times k | k = 0.5 for money remittance only, otherwise 1 |
| C | Interest income and expenses, commissions, other operating income | 10% up to €2.5m, 8% to €5m, 6% to €25m, 3% to €50m, 1.5% above; times k | Not below 80% of the three-year average indicator |
| D (EMD2) | Average outstanding e-money over six months | 2% of the average | Added to A, B or C for an EMI's other services |

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](https://www.consilium.europa.eu/en/press/press-releases/2025/11/27/payment-services-council-and-parliament-agree-to-step-up-the-fight-against-fraud-and-increase-transparency/)), 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](https://oeil.europarl.europa.eu/oeil/en/procedure-file?reference=2023%2F0209\(COD\)), [PSR](https://oeil.europarl.europa.eu/oeil/en/procedure-file?reference=2023%2F0210\(COD\))).

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](https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52023PC0366)). What the reform changes is covered in [PSD3 and the PSR](https://wiki.private.law/en/psd3-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 illustrative example. A payment institution processes €600m a year, so its Method B payment volume is €50m a month. The first €5m gives €200k, the next €5m gives €125k and the remaining €40m at 1% gives €400k. The total is €725k against initial capital of €125k: the formula requires almost six times the threshold.

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](https://eur-lex.europa.eu/eli/dir/2009/110/oj)). 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](https://wiki.private.law/en/bulgaria-emi-license).

## 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](https://eur-lex.europa.eu/eli/reg/2019/2033/oj); [Art. 9 IFD](https://eur-lex.europa.eu/eli/dir/2019/2034/oj)), 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](https://eur-lex.europa.eu/eli/reg/2019/2033/oj)).

**Permanent minimum**

Equal to initial capital: €75k for reception and transmission, execution, portfolio management, advice and placing without a firm commitment where the firm may not hold client assets; €750k for dealing on own account and underwriting; €150k for the rest. How one member state writes the same three tiers into its own statute is shown in [an investment firm in Bulgaria](https://wiki.private.law/en/bulgaria-investment-firm).

**FOR**

The fixed overheads requirement: at least one quarter of the preceding year's fixed overheads, roughly three months of costs. Profit-linked bonuses, partners' profit shares and non-recurring expenses are excluded.

**K-factors**

Translate into capital the risk to clients (assets under management, client money, safekeeping, orders), the risk to the market (own positions) and the risk to the firm (counterparties, concentration, trading flow).

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).

| K-factor | What it measures | Coefficient |
| --- | --- | --- |
| K-AUM | Assets under management and ongoing advice | 0.02% |
| K-CMH | Client money held | 0.4% on segregated accounts, 0.5% on non-segregated |
| K-ASA | Assets safeguarded and administered | 0.04% |
| K-COH | Client orders handled | 0.1% for cash trades, 0.01% for derivatives |
| K-DTF | Daily trading flow on own account | 0.1% for cash trades, 0.01% for derivatives |

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](https://eur-lex.europa.eu/eli/reg/2019/2033/oj)).

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](https://eur-lex.europa.eu/eli/reg/2023/1114/oj)).

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

| Class | Services | Permanent minimum |
| --- | --- | --- |
| 1 | Execution and transmission of orders, placing, transfers, advice, portfolio management | €50k |
| 2 | Class 1 plus custody and exchange of crypto-assets for funds or other crypto-assets | €125k |
| 3 | Class 2 plus operation of a trading platform | €150k |

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](https://eur-lex.europa.eu/eli/reg/2023/1114/oj)).

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](https://wiki.private.law/en/casp-license-guide).

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](https://eur-lex.europa.eu/eli/reg/2023/1114/oj)) — see [ART and EMT issuance](https://wiki.private.law/en/mica-art-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](https://eur-lex.europa.eu/eli/dir/2013/36/oj)). 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](https://eur-lex.europa.eu/eli/reg/2013/575/oj)). How the ECB assesses capital over the business-plan horizon is covered in the article on the [EU banking licence through the ECB](https://wiki.private.law/en/eu-banking-license-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](https://www.ecfr.gov/current/title-17/chapter-II/part-240/section-240.15c3-1)).

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

| Business model | Minimum net capital |
| --- | --- |
| Carries customer accounts and receives or holds their funds or securities | $250k |
| Dealer; firm exempt under Rule 15c3-3(k)(2)(i) | $100k |
| Introducing broker that receives but does not hold customer securities | $50k |
| Introducing broker that receives neither funds nor securities | $5k |

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](https://www.sfc.hk/en/faqs/intermediaries/supervision/Financial-resources-rules-and-financial-return/17-Mar-2003---Financial-resources-rules-and-financial-return)). 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](https://www.elegislation.gov.hk/hk/cap571N)).

| Regulated activity | Paid-up capital | Liquid capital |
| --- | --- | --- |
| Type 1, general case | HK$5m | HK$3m |
| Type 1 providing securities margin financing or acting as custodian of a private OFC | HK$10m | HK$3m |
| Type 1, approved introducing agent or trader | — | HK$500k |
| Type 4 and Type 9 not permitted to hold client assets | — | HK$100k |
| Type 4 and Type 9, any other case | HK$5m | HK$3m |

The figures come from the SFC [Licensing Handbook](https://www.sfc.hk/en/Rules-and-standards/Codes-and-guidelines/Guidelines/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](https://sso.agc.gov.sg/Act/PSA2019)); the amount is set in [reg. 13 of the Payment Services Regulations](https://sso.agc.gov.sg/SL/PSA2019-RG2).

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](https://sso.agc.gov.sg/SL/SFA2001-RG13)). 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](https://www.mas.gov.sg/-/media/mas-media-library/regulation/guidelines/cmg/guideline-sfa-04-g05-on-licensing-registration-and-conduct-of-business-for-fund-managers/guidelines-on-licensing-and-conduct-of-business-for-fund-management-companies-sfa-04-g05.pdf)).

| MAS licence | Base capital | In addition |
| --- | --- | --- |
| SPI | S$100k | — |
| MPI | S$250k | Security of S$100k where average monthly value is up to S$6m for each service, otherwise S$200k |
| Fund manager, accredited and institutional investors only | S$250k | Financial resources not below total risk requirement; MAS notified below 120% |
| Fund manager, retail clients outside collective schemes | S$500k | Same |
| Fund manager of retail collective schemes | S$1m | Same |

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](https://wiki.private.law/en/singapore-psa-payments).

## 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](https://eur-lex.europa.eu/eli/reg/2013/575/oj)).

Current-year losses, intangible assets including goodwill, and deferred tax assets that rely on future profitability are deducted from this amount ([Art. 36 CRR](https://eur-lex.europa.eu/eli/reg/2013/575/oj)). 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](https://eur-lex.europa.eu/eli/reg_del/2020/2176/oj)). 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](https://eur-lex.europa.eu/eli/dir/2015/2366/oj)). EMD2 does not repeat them: an EMI's own funds are the banking-directive items to which [Art. 5(1) EMD2](https://eur-lex.europa.eu/eli/dir/2009/110/oj) refers, now read as references to the CRR and CRD ([Art. 163 CRD](https://eur-lex.europa.eu/eli/dir/2013/36/oj)). 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](https://eur-lex.europa.eu/eli/dir/2013/36/oj)); how that test runs across sectors is set out in [qualifying holdings and fit and proper](https://wiki.private.law/en/qualifying-holding-fit-proper). What happens to capital when the owner changes is covered in [change of control](https://wiki.private.law/en/license-change-of-control).

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

| System | Counting condition |
| --- | --- |
| EU (CRR) | Tier 2: maturity of at least five years, no holder acceleration, early call only by the issuer with prior permission and not within five years |
| US (Rule 15c3-1) | Satisfactory subordination agreement under Appendix D |
| Hong Kong (FRR) | Loan approved by the SFC, which then falls outside ranking liabilities |

The EU conditions are set by [Arts. 63, 64 and 77 CRR](https://eur-lex.europa.eu/eli/reg/2013/575/oj): 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](https://eur-lex.europa.eu/eli/dir/2015/2366/oj)); 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](https://eur-lex.europa.eu/eli/reg/2019/2033/oj)). A CASP cannot use a subordinated loan at all: MiCA accepts only CET1, insurance or a comparable guarantee ([Art. 67(4) MiCA](https://eur-lex.europa.eu/eli/reg/2023/1114/oj)).

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](https://eur-lex.europa.eu/eli/dir/2015/2366/oj)), 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](https://wiki.private.law/en/source-of-funds), and the perimeter of the measures in the [sanctions route map](https://wiki.private.law/en/sanctions-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.

| Error | What happens | Provision |
| --- | --- | --- |
| Capital exactly at the threshold | The business-plan formula exceeds the threshold before the licence is granted | Arts. 8 and 9 PSD2, Art. 11 IFR, Art. 67 MiCA |
| Capital spent on the launch | The year's loss and intangible assets are deducted, and own funds drop below the requirement | Art. 36 CRR |
| Parent guarantee instead of paid-in equity | Not counted, apart from the named MiCA exception and MAS security | Art. 28 CRR; Art. 67(4) MiCA |
| Subordinated loan without the required terms | A short term or a lender's right of early repayment takes the loan out of capital | Art. 63 CRR; Appendix D to Rule 15c3-1 |
| Growth without recalculation | Outstanding e-money or client assets grow faster than capital | Art. 5 EMD2, Art. 15 IFR |

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](https://wiki.private.law/en/compliance-stack).

## Q/A

### Calculating the requirement

### Why does the statute say €350k when the regulator asks for more?

€350k is an EMI's initial capital at authorisation. On an ongoing basis the EMI holds the higher of that amount and the calculation: 2% of average outstanding e-money plus Method A, B or C for other payment services. The regulator runs the formula on the business plan before granting the licence and may increase the result by up to 20%.

### Who chooses between Methods A, B and C?

The national regulator, under national law. A payment institution does not pick a method to suit itself: it applies the one prescribed in the licensing country and may receive an add-on or a reduction of up to 20% after an assessment of its risk management.

### Does an investment firm without client money need to calculate K-factors?

Not if it also stays within all the small and non-interconnected thresholds — assets under management below €1.2bn, client orders handled below €100m a day in cash trades and €1bn a day in derivatives, balance sheet below €100m, revenue below €30m, no safekeeping and no own-account dealing. Its requirement is then the higher of the permanent minimum and one quarter of fixed overheads.

### When does the quarter-of-overheads test start for a CASP?

From the start of service provision. Until it has been providing services for a year, a CASP applies it to the projected fixed overheads for its first 12 months of service provision, as submitted with its application; after that, to the preceding year's actual overheads, reviewed annually.

### Sources of capital

### Can capital be covered by a parent-company guarantee?

For payment institutions, EMIs, investment firms and banks, no: capital must be paid up and sit on the balance sheet. MiCA allows a CASP to use an insurance policy or a comparable guarantee instead of CET1. MAS accepts a bank guarantee as an MPI's security, but it does not replace base capital.

### Does a subordinated loan count?

Yes, if it meets the regime's conditions, except for a CASP, which MiCA limits to CET1, insurance or a comparable guarantee. In the EU it counts as Tier 2: original maturity of at least five years, no holder right to accelerate, early repayment only at the issuer's option with prior supervisory permission and not within five years, straight-line amortisation over the final five years. A payment institution counts Tier 2 up to one third of Tier 1; an investment firm is limited by the IFR composition ratios. In the US, under an Appendix D agreement to Rule 15c3-1; in Hong Kong, with SFC approval.

### What happens if capital falls below the requirement?

Several regimes require immediate notice. An investment firm under IFR notifies its regulator as soon as it becomes aware that it no longer meets the requirement. In Hong Kong the licensee must notify the SFC in writing and cease regulated activity unless the SFC permits otherwise. A Singapore fund manager must notify MAS at once if its financial resources fall below 120% of its total risk requirement.

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## Factual claims

- 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).
- 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.
- As of September 2026 these rules apply unchanged.
- 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).
- 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.
- IFR, applicable since 26 June 2021, builds the investment-firm requirement from three competing numbers.
- Article 15 IFR sets the coefficients.
- 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.

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