72685432-caiib-super-notes-bank-financial-management-module-d-balance-sheet-management-capital-adequacy-–-the-basel-ii-overview...

8/22/2019 72685432-CAIIB-Super-Notes-Bank-Financial-Management-Module-D-Balance-Sheet-Management-Capital-Adequacy--The-Basel-II-Overview

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CAIIB Super-Notes M S Ahluwalia Sirf Business

Capital Adequacy The Basel-II Overview

Module D: Balance Sheet Management
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CAIIB

SUPER NOTES

Bank Financial Management: Capital Adequacy The Basel-II Overview
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Contents

Coverage:

1. Introduction

2. Basel II Revised

Framework

3. Scope of Application

4. Pillar 1: Minimum Capital

Requirements


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INTRODUCTION

1.


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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 internationallyactive banks

In Europe it is applicable to all banks

In European Union it is also applicable to financial institutions


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BASEL II REVISED FRAMEWORK

2.


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The Revised Framework

Adoption of stronger risk management practices by Banks

Greater use of assessment of Risk provided by Banks 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 Banks risk profiles

Recognizes the role of home country supervisors in implementation


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The Three Pillars

Consists of three mutually reinforcing pillars:

Minimum Capital Requirements

Supervisory Review of Capital Adequacy

Market Discipline


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The Three Pillars

Pillar I: MinimumCapital Requirement

Pillar I: MinimumCapital Requirement

Capital for Credit Risk

Standardised Approach

Internal Rating Based ApproachesFoundation Approach

Advanced Approach

Capital for Credit Risk


Internal Rating Based ApproachesFoundation 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 OperationalRisk

Basic Indicator Approach


Advanced Measurement Approach

Capital for OperationalRisk

Basic Indicator Approach


Advanced Measurement Approach

Pillar II: SupervisoryReview

Pillar II: SupervisoryReview

Evaluate Risk AssessmentEvaluate Risk Assessment

Ensure soundness and integrityof Banks internal processes to

assess the adequacy of capital

Ensure soundness and integrityof Banks internal processes to

assess the adequacy of capital

Ensure maintenance ofminimum capital with PCA for

shortfall

Ensure maintenance ofminimum 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: MarketDiscipline

Pillar III: MarketDiscipline

Enhanced DisclosuresEnhanced Disclosures

Core disclosures andSupplementary Disclosures

Core disclosures andSupplementary Disclosures

Disclosure Frequency: HalfYearly

Disclosure Frequency: HalfYearly


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SCOPE OF APPLICATION

3.


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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


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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


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MINIMUM CAPITAL REQUIREMENTS

4.


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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)


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Capital The Three Tiers

Tier I or CoreCapital

Tier II orSupplemental

Capital

Tier III Capital

Paid up Capital

Free Reserves

Unallocated surpluses

Less specified deductions

Subordinated debt of more than 5 yearsmaturity

Loan loss reserves

Revaluation reserves

Investment fluctuation reserves

Limited life preference shares

Short Term subordinated debt (maturity

< 2 yrs) Limited to 250% of banks Tier I capital

required to support market risk

Presently not allowed by RBI


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Do you have any questions or queries or some feedback to give?

Just mark an email to [email protected]
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CAIIB Super-Notes M S Ahluwalia Sirf BusinessFor 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
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