CAPITAL ADEQUACY RATIO AND BASEL -II.pdf

Capital adequacy and basel norms

1. CAPITAL ADEQUACY
RATIO
AND BASEL-II

2. Introduction
The Bank for International Settlements
(BIS) is an international financial
institution which is owned by member
central banks.Its primary goal is to foster
international monetary and financial
cooperation while serving as a bank for
central bank.
Banks for international
settlements (BIS)
Bank risks
Credit risk
market risk
operational risk

3. CAPITAL ADEQUACY RATIOCAPITAL ADEQUACY RATIO
The committee examined the issue of capital adequacy.
Capital adequacy approach came into prominent in july
1998.
The committee on Banking Regulations and supervising
Practices( popularly known as Basel committee or Cookes
Committee) released the framework on international
convergence of capital measures of strenght of bank.

4. MEANINGMEANING
Capital adequacy ratio(CAR), also called Capital to Risk Assets
Ratio(CRAR), It is a ratio of a bank’s capital to its risk. National regulations
track a bank’s CAR to ensure that it can absorb a reasonable amount of
loss and are complying with their statutory capital requirements.
The Basel Committee adopted weighted risk approach.It is a ratio of
capital fund to risk-weighted assets. It is expressed in percentage terms.
CA = ____Capital Funds_ 100
Risk Weighted Assets

5. USES OF CARUSES OF CAR
It determines the capacity of the bank in terms of meeting the time liabilties
and other risk such as credit risk,operational risk , etc
Protects depositors by maintaining confidence in banking system.
CAR ia similar to leverage;in the most basic formulation , it is comparable to
the inverse of the debt-to-equity leverage formulations.
Unlike traditional leverage, however, it recognizes that assets can have
different levels of risk

6. TYPES OF CAPITALTYPES OF CAPITAL
1.TIER-I CAPITAL: Actual contributed equity plus retained earnings.
2.TIER-II CAPITAL: Preferred shares plus 50% os subordinated debt
DIFFFERENT MINIMUM CAR RATIOS APPLIED:
TIER-I:4%
TIER-II:8%

7. TIER-I---CORE CAPITALTIER-I---CORE CAPITAL
Paid up capital
Statutory Reseves
Disclosed Free Reseves
Capital Reseves representing surplus arising out of sale
proceeds of assets MINUS
Equity investments in subsidiaries
Losses in current period and those brought forward from
previous years and
Intangible Assets
Tier-I Capital should at no point of time be less than 50% of the total
capital.

8. TIER-II CAPITAL CONSISTS OFTIER-II CAPITAL CONSISTS OF
Undisclosed Reserves and cumulative perpectual preference Shares.
Revaluation Reserves.
General provisions and loss reserves upto za maximum 1.25% of weighted risk
assets.
Investment Fluctuation reserves not subject to 1.25% restriction.
Hybrid debt capital instruments(Bonds).
Subordinate debt (Long term unsecured loans).
Tier-II cannot be more than 50% of the total capital.

9. RISK WEIGHTED ASSETS(RWAs)RISK WEIGHTED ASSETS(RWAs)
For purpose of calculating capital adequacy, risk weights have to be
assigned to different category - the so-called RWA measure.
CATEGORY I (WEIGHT 0 PERCENT)1.
CATEGORY II (WEIGHT 20 PERCENT)2.
CATEGORYIII (WEIGHT 50 PERCENT)3.
CATEGORY IV (WEIGHT 1OO PERCENT)4.

11. Source: https://rbi.org.in/scripts/bs_viewcontent.aspx?
Id=2023

12. DEFECTS OF THE BASEL IDEFECTS OF THE BASEL I
The Accord was criticised for assigning different weights to OECD
and non-OCED exposures of banks.
1.
It made emphasis on credit neglecting others.2.
The accord did not distinguish between sound and weak banks
using a” one hat fit all” approach.
3.
Finally, there are objections to CRAR as a method of regulations.4.

13. IMPLICATIONS OF NOT
MEETING CAN
IMPLICATIONS OF NOT
MEETING CAN
Credibility of banks will be adversely affected.1.
Restricts the flexibility and expansion2.
fall in deposits3.
Fall in profitability4.
Decline in economic growth5.
No satisfactory response from Capital market6.

14. HOW TO IMPROVE CARHOW TO IMPROVE CAR
Mergers1.
Better Assets Management2.
Improved Recovery Methods3.
Recapitalisation by Government4.
Equity Participation by Employees5.
Raising Funds through capital Market6.

15. BASEL II ACCORD/NORMSBASEL II ACCORD/NORMS
Basel Accord II was finalised on June 26,2004.
According to RBI’s declaration , Indian banks having foreign branches
and foreign banks operating in India have to migrate to Basel II norms
from March 31,2008 while all other commercial banks excluding local
area banks and Regional Rural Banks have been permitted to adopt
Basel II norms latest by March 31,2009.
The basel Commitee clubbed various risk situations into three
categories:
2. MARKET RISK
1.CREDIT RISK 3.OPERATIONAL RISK

17. The committee identified three pillars for risk
management:
1.PILLAR I-Minimum capital requirement
2.PILLAR II-Supervisory Reveiw Process
3.PILLAR III-Market discipline
This accord was to be implemented by March 2007 but the date was
postponed
DEFECTS OF BASEL II
Excessive reliance on credit rating agencies; poor risk
assessments.
Complex framework with its inetrnal ratings based (IRB)
approach.
Inadequate focus on systematic risk
Encouragement of procyclicality due to the risk sensitive capital
requirements.

18. CAPITAL ADEQUACY---
INDIAN CONTEXT
CAPITAL ADEQUACY---
INDIAN CONTEXT
The Narasimham Committee I recommended the adoption of BIS norms on capital
adequacy for banks which was accepted by the RBI.The RBI introduced in April 1992 a
risk- weighted asset ratio system for all banks in India as a capital adequacy measure.
Fundamental objectives of stipulating capital adequacy
based on risk-weighted assets were to:
1.to ensure the strength, soundness, stability of the banking system.
2.to ensure a fair and high degree of consistency in its application.
Based on the recommendations of the commmittee on the Banking Sector
Reforms,1998 the minimum CRAR was raised to 9%, effective from March
31,2000.

19. STATUS OF BASEL III
CAPITAL ADEQUACY NORMS
STATUS OF BASEL III
CAPITAL ADEQUACY NORMS
Basel III is a consultative document entitled ‘Strengthening the Resilence
of the Banking Sector’.
It was promulgated by the Basel Committee on Banking Supervision at the
Bank for International Settlements(BIS) in Basel, Switzerland on December
17, 2009.
This document was an expanded and updated version of an earlier
document entitlted , Enchancement of the Basel II Framework
published in July 2009.

20. 1.RBI adopted Basel III guidelines with the aim to:
Improve the banking sector’s ability to deal with financial &
economic stress
enhance risk management
strengthen the bank’s transparency
2. it was initially planned to phase Basel III norms from April1,
2013.
3. Under Basel III norms, Indian banks are required to maintain
higher minimum capital requirements.

21. NEW DEFINATION OF CAPITALNEW DEFINATION OF CAPITAL
Basel III redefines regulatory capital. The committee determined that Tier
1 capital must consist predominantly of common equity and retained
earnings to raise the quality, consistency, and transparency of regulatory
capital.
Under current standards, there are two types
of capital counted in meeting the capital
adequacy rules under Basel I:
1.CORE CAPITAL 2.SUPPLEMENTARY CAPITAL

22. Banks can hold 2% of common equity to risk- weighted assets.
The Central bank governors approved a capital requirement policy that would
increase the minimum common equity that banks must hold as capital from
the current 2% to 4.5% by 2015.
The share of these three added assets should not exceed in aggregate more
than 15% of a bank’s Tier 1 capital, which limits dilution of the amount of
common tangible equity in Tier 1 capital.
A. CAPITAL
CONSERVATION
BUFFER
B.COUNTERCYCLICAL
CAPITAL
BUFFER
C.NEW LIQUIDITY
REQUIREMENT

23. PRESENT STATUS OF
BASEL NORMS IN INDIA
BASEL III implementation
capital requirements
liquidity standards

24. BIBLIOGRAPHY
https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2023
https://www.bis.org
https://taxguru.in/rbi/rbis-master-direction-basel-iii-
investment-norms-2023.html
https://www.fortuneindia.com/macro/rbi-issues-draft-rules-
for-minimum-capital-requirements-under-basel-iii/111654
https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx
?prid=56410

25. https://testbook.com/ias-preparation/basel-iii-
norms-upsc-notes
https://www.fortuneindia.com/macro/rbi-issues-
draft-rules-for-minimum-capital-requirements-
under-basel-iii/111654
https://www.rbi.org.in/scripts/BS_PressReleaseDis
play.aspx?prid=56410
https://www.bis.org/fsi/fsisummaries/b3_capital.ht
m