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8 1 = | 8 1 GI KTSA
Beta of Business Lines
Business Lines
Beta Factors
Corporate finance (1)
18%
Trading and sales (2)
18%
Retail banking (3)
12%
Commercial banking (4)
15%
Payment and settlement (5)
18%
Agency services (6)
15%
Asset management (7)
12%
Retail brokerage (8)
12%
Operational Risk - Advanced
Measurement Approaches
Under the AMA, the regulatory capital
requirement will equal the risk measure
generated by the banks internal
operational risk measurement system
using the quantitative and qualitative
criteria for the AMA.
Use of the AMA is subject to supervisory
approval.
Pillar 2: Supervisory Review
Principle 1: Banks should have a process
for assessing and maintaining their overall
capital adequacy.
Principle 2: Supervisors should review and
evaluate banks internal capital adequacy
assessments and strategies.
Supervisory Review
Principle 3: Supervisors should expect
banks to operate above the minimum
regulatory capital ratios.
Principle 4: Supervisors should intervene
at an early stage to prevent capital from
falling below the minimum levels.
Pillar 3: Market Discipline
The purpose of pillar three is to
complement the pillar one and pillar two.
Develop a set of disclosure requirements
to allow market participants to assess
information about a banks risk profile and
level of capitalization.
Minimum Capital Adequacy Ratios
Tier one capital to total risk weighted
credit exposures to be not less than 4 %;
Total capital (i.e. tier one plus tier two less
certain deductions) to total risk weighted
credit exposures to be not less than 8%
Calculation of Capital
Tier One Capital
the ordinary share capital (or equity) of
the bank; and
audited revenue reserves e.g.. retained
earnings; less
current year's losses;
future tax benefits; and
intangible assets, e.g. goodwill.
Calculation of Capital
Upper Tier Two Capital
Un-audited retained earnings;
revaluation reserves;
general provisions for bad debts;
perpetual cumulative preference shares (i.e.
preference shares with no maturity date whose
dividends accrue for future payment even if the
bank's financial condition does not support
immediate payment);
perpetual subordinated debt (i.e. debt with no
maturity date which ranks in priority behind all
creditors except shareholders).
Calculation of Capital
Lower Tier Two Capital
Subordinated debt with a term of at least
5 years;
Sedeemable preference shares which may
not be redeemed for at least 5 years.
Restrictions
Tier two capital may not exceed 100% of
tier one capital;
Lower tier two capital may not exceed
50% of tier one capital;
Lower tier two capital is amortized on a
straight line basis over the last five years
of its life.
Total Capital
This is the sum of tier 1 and tier 2 capital
less the following deductions:
equity investments in subsidiaries;
shareholdings in other banks that exceed
10 percent of that bank's capital;
unrealized revaluation losses on securities
holdings.
Module D
Capital Management
Capital Management
&
Profit Planning
Basel II
Tier I-Core Capital
Paid up capital ,Free Reserves and unallocated surpluses
Tier II-Supplementary Capital
Subordinated debt of more than 5 years maturity ,loan
loss reserve, revaluation reserve,investment
fluctuation reserve,limited life preference share-
restricted to 100% of tier I capital
Tier III Capital
subordinated debt with shot term maturity [min 2 years]
for market risk
Total Risk weighted Assets
Risk weighted assets of credit risk
plus
12.5* Capital requirement for market risk
plus
12.5* capital requirement for for
operational risk
Three pillars
First Pillar-minimum capital requirements
Second pillar-supervisory process
Third pillar-market discipline
Capital Charge for Credit Risk
Standardized Approach Internal rating based
approach
[1]Foundation Approach
[2]Advanced IRB
Approach
Credit rating of
sovereign
Risk weight for
sovereign
Risk weight for
banks in that
country
AAA TO AA 0% 20%
A+ TO A 20% 50%
BBB+ TO BBB- 50% 100%
BB+ TO BB- 100% 100%
BELOW B- 150% 150%
Risk Weight
Retail & SME
EXPOSURE
75%
Mortgage on
Residential
Property
35%
Past Due Loans
150% When specific
provisions are
less than 20%
of the loan
amount
-do-
100% If provision is
higher than
20%
Capital Charge for Operational
Risk
The Basic Indicator Approach
The Standardized Approach
Advanced Management Approach
Standardized Approach
for
Operational Risk
Beta factor- a fixed percentage set by Basel
committee
Maximum 18%
Minimum 12%
Banks activities are divided into 8 business lines-
corporate finance,trading,retail banking,
commercial banking, payment &settlement,
agency services, asset management, retail
brokering
Asset Classification
Standard Assets
Sub Standard Assets
Doubtful Assts
Loss Assets
Provisioning
Standard Assts 0.40%
Substandard-
Secured -provision 10%
Unsecured[realisable value is not more
than 10% of o/s] provision 20%
Provision
Doubtful I- first 12 months
Provision 20% realizable value of security plus
100% shortfall of security
Doubtful II-further 24 months
Provision 30% realizable value of security plus
100% shortfall of security
Doubtful III-for over 36 months
100% provision
Loss Assets 100%
Thank you
With Best Wishes
ravindran@iibf.org.in