CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Capital Adequacy...
-
Upload
m-s-ahluwalia -
Category
Documents
-
view
9.140 -
download
1
description
Transcript of CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Capital Adequacy...
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Capital Adequacy – The Basel-II Overview
Module D: Balance Sheet Management
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CAIIB – SUPER NOTES
Bank Financial Management: Capital Adequacy – The Basel-II Overview
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Contents
Coverage:
1. Introduction
2. Basel II – Revised
Framework
3. Scope of Application
4. Pillar 1: Minimum Capital
Requirements
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
INTRODUCTION
1.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Introduction
• BCBS released the “International Convergence of Capital
Measurement and Capital Standards: A Revised Framework”
on June 26, 2004
• Updated in Nov 2005 to include trading activities and the
treatment of double default effects
• Apply to ‘internationally active’ banks
• In Europe it is applicable to all banks
• In European Union it is also applicable to financial institutions
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
BASEL II – REVISED FRAMEWORK
2.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
The Revised Framework
• Adoption of stronger risk management practices by Banks
• Greater use of assessment of Risk provided by Bank’s internal systems as
inputs to capital calculations
• Demands capital allocation for operational risk
• National regulators are free to set higher standards
• Provides incentives for banks to invest and increase the sophistication of
their internal risk management capabilities in order to gain reductions in
capital
• Aligns regulatory capital with Bank’s risk profiles
• Recognizes the role of home country supervisors in implementation
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
The Three Pillars
• Consists of three mutually reinforcing pillars:
– Minimum Capital Requirements
– Supervisory Review of Capital Adequacy
– Market Discipline
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
The Three Pillars
Pillar I: Minimum Capital Requirement
Pillar I: Minimum Capital Requirement
Capital for Credit Risk
•Standardised Approach
•Internal Rating Based Approaches
•Foundation Approach
•Advanced Approach
Capital for Credit Risk
•Standardised Approach
•Internal Rating Based Approaches
•Foundation Approach
•Advanced Approach
Capital for Market Risk
•Standardised Method
•Maturity Method
•Duration Method
Capital for Market Risk
•Standardised Method
•Maturity Method
•Duration Method
Capital for Operational Risk
•Basic Indicator Approach
•Standardised Approach
•Advanced Measurement Approach
Capital for Operational Risk
•Basic Indicator Approach
•Standardised Approach
•Advanced Measurement Approach
Pillar II: Supervisory Review
Pillar II: Supervisory Review
Evaluate Risk Assessment Evaluate Risk Assessment
Ensure soundness and integrity of Bank’s internal processes to assess the adequacy of capital
Ensure soundness and integrity of Bank’s internal processes to assess the adequacy of capital
Ensure maintenance of minimum capital with PCA for
shortfall
Ensure maintenance of minimum capital with PCA for
shortfall
Prescribe differential capital, where necessary i.e., where the
internal processes are slack
Prescribe differential capital, where necessary i.e., where the
internal processes are slack
Pillar III: Market Discipline
Pillar III: Market Discipline
Enhanced Disclosures Enhanced Disclosures
Core disclosures and Supplementary Disclosures
Core disclosures and Supplementary Disclosures
Disclosure Frequency: Half Yearly
Disclosure Frequency: Half Yearly
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
SCOPE OF APPLICATION
3.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Scope of Application
• All Commercial Banks (except Local Area Banks and Regional
Rural Banks)
• At solo level (global position) as well as consolidated level
• Group companies engaged in insurance business and
businesses not pertaining to financial services may be
excluded
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Applicable Approaches
• RBI has stipulated that all commercial banks in India shall
adopt:
– Standardised Approach (SA) for Credit Risk
– Basic Indicator Approach (BIA) for Operational Risk
– Standardised Duration Approach (SDA) for Market Risk
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
MINIMUM CAPITAL REQUIREMENTS
4.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Minimum Capital Requirements
• Capital Adequacy Ratio = Regulatory Capital/Total Risk weighted
assets
• Total capital Ratio ≥ 8%
• Scope of risk weighted assets expanded to include Market Risk and
Operational Risk
• Total RWA include capital requirement for Market Risk and
Operational Risk multiplied by 12.5(1/8*100)
– Total RWA = RWA for Credit Risk + 12.5 * (Capital Requirement for Market
Risk and Operational Risk)
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Capital – The Three Tiers
Tier I or Core Capital
Tier II or Supplemental
Capital
Tier III Capital
• Paid up Capital
• Free Reserves
• Unallocated surpluses
• Less specified deductions
• Subordinated debt of more than 5 years maturity
• Loan loss reserves
• Revaluation reserves
• Investment fluctuation reserves
• Limited life preference shares
• Short Term subordinated debt (maturity < 2 yrs)
• Limited to 250% of bank’s Tier I capital required to support market risk
• Presently not allowed by RBI
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Do you have any questions or queries or some feedback to give?
Just mark an email to [email protected]
CAIIB – Super-Notes © M S Ahluwalia Sirf Business For more Super-Notes: Click Here
M S Ahluwalia, amongst other things, is a visual artist, blogger,
blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida