CAIIB-ABM-MOD-D-Capital Adequacy - The Basel-II Overview Capital Adequacy - The Basel-II Overview The Basel Committee provided the framework for capital adequacy in 1988, which is known as the Basel-I accord.
The Basel-I accord provided global standards for minimum capital requirements for banks.
The Revised Framework consists of three-mutually reinforcing pillars, viz., minimum capital requirements, supervisory review of capital adequacy, and market discipline.
The Framework offers three distinct options for computing capital requirement for credit risk and three other options for computing capital requirement for operational risk.
The options available for computing capital for credit risk are Standardised Approach, Foundation Internal Rating Based Approach and Advanced Internal Rating Based Approach.
The options available for computing Market risk is standardized approach (based on maturity ladder and duration baSed) and advanced approach, i.e., internal models such as VAR .
The options available for computing capital for operational risk are Basic Indicator Approach, Standardised Approach and Advanced Measurement Approach.
The revised capital adequacy norms shall be applicable uniformly to all Commercial Banks (except Local Area Banks and Regional Rural Banks).
A Consolidated bank is defined as a group of entities where a licensed bank is the controlling entity.
All commercial banks in Indiashall adopt Standardised Approach (SA) for credit risk and Basic Indicator Approach (BIA) for operational risk.
Banks shall continue to apply the Standardised Duration Approach (SDA) for computing capital requirement for market risks.
The term capital would include Tier-I or core capital, Tier-II or supplemental capital, and Tier-Ill capital Core capital consists of paid up capital, free reserves and unallocated surpluses, less specified deductions. Supplementary capital comprises subordinated debt of more than five years' maturity, loan loss reserves, revaluation reserves, investment fluctuation reserves, and limited life preference shares.
Tier-II capital is restricted to 100% of Tier-I capital as before and long-term subordinated debt may not exceed 50% of Tier-I capital.
Tier-Ill capital will be limited to 250% of a bank's Tier-1 capital that is required to support market risk. This means that a minimum of about 28.5% of market risk needs to be supported by Tier-I capital.
Any capital requirement arising in respect of credit and counter-party risk needs to be met by Tier-I and Tier-II capital.
Capital adequacy ratio(C) = Regulatory capital(R)/Total risk weighted assets(T). Regulatory Capital ‘R’=C*T and Total Risk weighted Assets ‘T’= R/C
Total Risk weighted assets =(Risk weighted assets for credit risk) +(12.5*Capital requirement for market risk)+(12.5*Capital requirement for operational risk)