baselpillar12

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The First Pillar MinimumThe First Pillar MinimumCapital RequirementsCapital Requirements


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Calculation of minimum capitalCalculation of minimum capitalrequirementsrequirements

Calculation of the total minimum capitalCalculation of the total minimum capitalrequirements for credit, market andrequirements for credit, market andoperational risk. The capital ratio isoperational risk. The capital ratio iscalculated for using the definition of calculated for using the definition of regulatory capitalregulatory capital andand riskrisk--weightedweightedassetsassets . The total capital ratio must be no. The total capital ratio must be no

lower than 8%. Tier 2 capital is limited tolower than 8%. Tier 2 capital is limited to100% of Tier 1 capital.100% of Tier 1 capital.


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Calculation of minimum

capital requirements

Regulatory capital

Risk-weighted assets

Transitional arrangements


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B anks using the IR B approach for B anks using the IR B approach for securitisation exposures or the PD/LGDsecuritisation exposures or the PD/LGDapproach for equity exposures must firstapproach for equity exposures must firstdeduct the EL amounts subject to thededuct the EL amounts subject to thecorresponding conditionscorresponding conditionsB anks using the IR B approach for other B anks using the IR B approach for other asset classes must compareasset classes must compare

(i)(i) the amount of total eligible provisionsthe amount of total eligible provisions

withwith(ii)(ii) the total expected losses amount asthe total expected losses amount as

calculated within the IR B approach.calculated within the IR B approach.


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W here the totalW here the totalexpected loss amountexpected loss amountexceeds total eligibleexceeds total eligibleprovisions:provisions:

banks must deduct thebanks must deduct the

difference. Deductiondifference. Deductionmust be on the basismust be on the basisof 50% from Tier 1of 50% from Tier 1and 50% from Tier 2.and 50% from Tier 2.

W here the totalW here the totalexpected loss amountexpected loss amountis less than totalis less than totaleligible provisionseligible provisionsbanks may recognisebanks may recognisethe difference in Tier the difference in Tier

2 capital up to a2 capital up to amaximum of 0.6% of maximum of 0.6% of credit riskcredit risk- -weightedweightedassets. At nationalassets. At national

discretion, a limitdiscretion, a limitlower than 0.6% maylower than 0.6% maybe applied.be applied.


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RiskRisk--weighted assetsweighted assets

Total riskTotal risk- -weighted assets=weighted assets={12.5X(cap requi for market risk and{12.5X(cap requi for market risk and

operational risk)} + sum of risk weightedoperational risk)} + sum of risk weightedassets for credit riskassets for credit risk


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Transitional arrangements

F or banks using the IRB approach for creditrisk or the Advanced MeasurementApproaches (AMA) for operational risk , therewill be a capital floor following implementation of this F ramework.B anks must calculate the difference between

(i) the floor as defined in the following slide and

(ii) the amount as calculated according to next tothe following slide. If the floor amount is larger,banks are required to add 12.5 times thedifference to risk-weighted assets.


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The capital floor is based on application of the 1988 Accord. It is derived by applying anadjustment factor to the following amount:

8% of the risk-weighted assets+Tier1 and 2capital deductions-the amount of generalprovisions that may be recognised in Tier2


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In the years in which the floor applies, banksmust also calculate

8% total risk weighted assets the differencebetween total provisions and expected lossamount + other Tier1and 2 deductions

W here a bank uses the standardizedapproach to credit risk for any portion of itsexposures, it also needs to exclude generalprovisions that may be recognised in Tier 2for that portion from the amount calculatedaccording to the first sentence of this

paragraph.


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S hould problems emerge during this period,

the Committee will seek to take appropriatemeasures to address them, and, inparticular, will be prepared to keep the floorsin place beyond 2009 if necessary.The Committee believes it is appropriate for supervisors to apply prudential floors tobanks that adopt the IR B approach for credit

risk and/or the AMA for operational riskfollowing year-end 2008.


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The constituentsof capital

Core capital(basic equity or

Tier 1

Supplementarycapital

Short-termsubordinated debtCovering market

Risk (Tier 3)

Deductions fromcapital

Undisclosedreserves

Revaluationreserves

Generalprovisions/

General loan-lossreserves

Hybrid debt capitalinstruments

Subordinateddebt


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Core capital (basic equity or Tier 1)

The Committee considers that the keyelement of capital on which the main

emphasis should be placed is equitycapital (issued and fully paid ordinaryshares and non-cumulative preferredstock - cumulative preferred stock) anddisclosed reserves- Common to allcountries banking system W holly visible inthe published accounts


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Supplementary capitalUndisclosed reserves:Undisclosed reserves:

only reserves which, though unpublished,only reserves which, though unpublished,have been passed through the profit andhave been passed through the profit and

loss account and which are accepted by theloss account and which are accepted by thebanks supervisory authorities.banks supervisory authorities.May be constituted in various waysMay be constituted in various waysaccording to differing legal and accountingaccording to differing legal and accountingregimes in member countriesregimes in member countries


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Revaluation reserves

S ome countries, under their national regulatory or accounting arrangements, allow certain assets tobe revalued to reflect their current value, or something closer to their current value thanhistoric cost, and the resultant revaluationreserves to be included in the capital base. S uchrevaluations can arise in two ways:from a formal revaluation, carried through to thebalance sheets of banks' own premises; or from a notional addition to capital of hidden valueswhich arise from the practice of holding securities

in the balance sheet valued at historic costs.


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The committee considers these reserves canThe committee considers these reserves canbe included inbe included in supplementary capital supplementary capital sincesincethey can be used to absorb losses on athey can be used to absorb losses on agoinggoing--concern basis.concern basis.The reserves are subjected to a substantialThe reserves are subjected to a substantialdiscount in order to reflect to concerns bothdiscount in order to reflect to concerns bothabout market volatility and about the taxabout market volatility and about the taxcharge which would arise were such casescharge which would arise were such casesto be realised.to be realised.

A discount of 55% on the difference betweenA discount of 55% on the difference betweenthe historic cost book value and marketthe historic cost book value and marketvalue is agreed to be appropriate in the lightvalue is agreed to be appropriate in the lightof these considerations.of these considerations.


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G eneral provisions/general loan- loss reserves

These reserves are created against the possibilityThese reserves are created against the possibilityof losses not yet identified.of losses not yet identified.W here they do not reflect a known deterioration inW here they do not reflect a known deterioration inthe valuation of particular assets, these reservesthe valuation of particular assets, these reservesqualify for inclusion in Tier 2 capital.qualify for inclusion in Tier 2 capital.B ut reserves for protecting banks from identifiedB ut reserves for protecting banks from identified

deterioration in the quality of specific assetsdeterioration in the quality of specific assetsshould be ineligible for inclusion in capital.should be ineligible for inclusion in capital.


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These reserves that qualify for inclusion inThese reserves that qualify for inclusion in

Tier 2 under the terms described above doTier 2 under the terms described above doso subject to a limit of so subject to a limit of (a) 1.25% of weighted risk assets to the(a) 1.25% of weighted risk assets to theextent a bank uses the standardisedextent a bank uses the standardisedapproachapproach(b) 0.6 % of credit risk(b) 0.6 % of credit risk- -weighted assets toweighted assets tothe extent a bank uses the IR B approachthe extent a bank uses the IR B approachfor credit risk.for credit risk.


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Hyb rid de b t capital instruments

In this category fall a number of capitalIn this category fall a number of capitalinstruments which combine certaininstruments which combine certain

characteristics of equity and certaincharacteristics of equity and certaincharacteristics of debt.characteristics of debt.


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S u b ordinated term de b t

W ith a minimum original term to maturity of W ith a minimum original term to maturity of over five years may be included with theover five years may be included with the

supplementary elements of capital.supplementary elements of capital.


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Short-term subordinated debtcovering market risk (Tier 3)

Consists of shortConsists of short- -term subordinated debt.term subordinated debt.shortshort--term subordinated debtterm subordinated debt: :

be unsecured, subordinated and fully paid up;be unsecured, subordinated and fully paid up;

have an original maturity of at least two years;have an original maturity of at least two years;

not be repayable before the agreed repayment datanot be repayable before the agreed repayment dataunless the supervisory authority agrees;unless the supervisory authority agrees;

be subject to a lockbe subject to a lock- -in clause which stipulates thatin clause which stipulates thatneither interest nor principal may be paid (even atneither interest nor principal may be paid (even atmaturity) if such payment means that the bank fallsmaturity) if such payment means that the bank fallsbelow or remains below it minimum capital requirementbelow or remains below it minimum capital requirement


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B anks will entitled to use Tier 3 capitalB anks will entitled to use Tier 3 capitalsolely to support market risks.solely to support market risks.This will be limited to 250% of a banks Tier This will be limited to 250% of a banks Tier 1 capital that is required to support market1 capital that is required to support marketrisks.risks.The sum total of Tier 2+Tier 3 should not beThe sum total of Tier 2+Tier 3 should not bemore than Tier .more than Tier .


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Deductions from capital

Goodwill from Tier 1Goodwill from Tier 1Increase in equity capital resulting from aIncrease in equity capital resulting from asecuritisation exposure from Tier 2securitisation exposure from Tier 2

Investment in subsidiaries engaged in banking andInvestment in subsidiaries engaged in banking andfinancial activities which not consolidated infinancial activities which not consolidated innational systems.national systems.The committee carefully considered the possibilityThe committee carefully considered the possibilityof requiring deduction of banks holdings of capitalof requiring deduction of banks holdings of capitalissued by other banks or depositissued by other banks or deposit- -takingtakinginstitutions, whether in the form of equity or of institutions, whether in the form of equity or of other capital instruments.other capital instruments.


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M.S .S rikanthM.S .S rikanth

--ICF AIICF AI

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