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CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Capital Adequacy – The Basel-II Overview

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CAIIB Super Notes: If you are preparing for CAIIB- these are a must-have. Visit http://sirfbusiness.blogspot.com for more info.

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CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Capital Adequacy – The Basel-II Overview

  1. 1. CAIIB – Super-Notes© M S Ahluwalia Sirf Business Capital Adequacy – The Basel-II Overview Module D: Balance Sheet Management
  2. 2. CAIIB – Super-Notes© M S Ahluwalia Sirf Business CAIIB – SUPER NOTES Bank Financial Management: Capital Adequacy – The Basel-II Overview
  3. 3. 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
  4. 4. CAIIB – Super-Notes© M S Ahluwalia Sirf Business INTRODUCTION 1.
  5. 5. 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 ‘internationally active’ banks • In Europe it is applicable to all banks • In European Union it is also applicable to financial institutions
  6. 6. CAIIB – Super-Notes© M S Ahluwalia Sirf Business BASEL II – REVISED FRAMEWORK 2.
  7. 7. 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 Bank’s 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 Bank’s risk profiles • Recognizes the role of home country supervisors in implementation
  8. 8. 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
  9. 9. CAIIB – Super-Notes© M S Ahluwalia Sirf Business The Three Pillars Pillar I: Minimum Capital Requirement Pillar I: Minimum Capital Requirement Capital for Credit Risk •Standardised Approach •Internal Rating Based Approaches •Foundation Approach •Advanced Approach Capital for Credit Risk •Standardised Approach •Internal Rating Based Approaches •Foundation 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 Operational Risk •Basic Indicator Approach •Standardised Approach •Advanced Measurement Approach Capital for Operational Risk •Basic Indicator Approach •Standardised Approach •Advanced Measurement Approach Pillar II: Supervisory Review Pillar II: Supervisory Review Evaluate Risk AssessmentEvaluate Risk Assessment Ensure soundness and integrity of Bank’s internal processes to assess the adequacy of capital Ensure soundness and integrity of Bank’s internal processes to assess the adequacy of capital Ensure maintenance of minimum capital with PCA for shortfall Ensure maintenance of minimum 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: Market Discipline Pillar III: Market Discipline Enhanced DisclosuresEnhanced Disclosures Core disclosures and Supplementary Disclosures Core disclosures and Supplementary Disclosures Disclosure Frequency: Half Yearly Disclosure Frequency: Half Yearly
  10. 10. CAIIB – Super-Notes© M S Ahluwalia Sirf Business SCOPE OF APPLICATION 3.
  11. 11. 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
  12. 12. 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
  13. 13. CAIIB – Super-Notes© M S Ahluwalia Sirf Business MINIMUM CAPITAL REQUIREMENTS 4.
  14. 14. 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)
  15. 15. CAIIB – Super-Notes© M S Ahluwalia Sirf Business Capital – The Three Tiers Tier I or Core Capital Tier II or Supplemental Capital Tier III Capital • Paid up Capital • Free Reserves • Unallocated surpluses • Less specified deductions • Subordinated debt of more than 5 years maturity • Loan loss reserves • Revaluation reserves • Investment fluctuation reserves • Limited life preference shares • Short Term subordinated debt (maturity < 2 yrs) • Limited to 250% of bank’s Tier I capital required to support market risk • Presently not allowed by RBI
  16. 16. 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
  17. 17. CAIIB – Super-Notes© M S Ahluwalia Sirf Business For 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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