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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 M S Ahluwalia Sirf Business
CAIIB
SUPER NOTES
Bank Financial Management: Capital Adequacy The Basel-II Overview
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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
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CAIIB Super-Notes M S Ahluwalia Sirf Business
INTRODUCTION
1.
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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 internationallyactive banks
In Europe it is applicable to all banks
In European Union it is also applicable to financial institutions
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CAIIB Super-Notes M S Ahluwalia Sirf Business
BASEL II REVISED FRAMEWORK
2.
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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 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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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
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CAIIB Super-Notes M S Ahluwalia Sirf Business
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
Standardised Approach
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
Standardised Approach
Advanced Measurement Approach
Capital for OperationalRisk
Basic Indicator Approach
Standardised 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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CAIIB Super-Notes M S Ahluwalia Sirf Business
SCOPE OF APPLICATION
3.
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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
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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
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CAIIB Super-Notes M S Ahluwalia Sirf Business
MINIMUM CAPITAL REQUIREMENTS
4.
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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)
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CAIIB Super-Notes M S Ahluwalia Sirf Business
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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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 super.msahluwalia@yahoo.com
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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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