Unit - 21 : Banking Regulation and Capital Regulation
CAIIB-ABM-MOD-D-Banking Regulation and Capital Banking Regulation and Capital Systemic risk is the risk that a default by one financial institution will create a 'ripple effect' that leads to defaults by other financial institutions and threatens the stability of the financial system.
In calculating the Cooke ratio both on-balance-sheet and off-balance-sheet items are considered. They are used to calculate bank's total risk-weighted assets. It is a measure of the bank's total credit exposure.
CRAR = Capital/Risk Weighted Assets. Tier-I capital consists mainly of share capital and disclosed reserves and it is a bank's highest quality capital because it is fully available to cover losses.
Tier-II capital on the other hand consists of certain reserves and certain types of subordinated debt. The loss absorption capacity of Tier-II capital is lower than that of Tier-I capital.
The elements of Tier-I capital include Paid-up capital (ordinary shares), statutory reserves, and other disclosed free reserves.