Evaluating Basel

In: Business and Management

Submitted By lovely1992
Words 10400
Pages 42
END TERM PROJECT
COMMERCIAL BANK MANAGEMENT

TOPIC 5
BANK CAPITAL MANAGEMENT- CAPITAL ADEQUACY FRAMEWORK

Submitted to:

Submitted by: Group 5

Prof. D.N. Panigrahi

Abhishek Singh (2014013)
Anisha jain (2014042)
Bakul Malik (2014072)
Gurusha Godwani (2014100)
Ketki Chaturvedi (2014133)

CHAPTER 1
BANK CAPITAL MANAGEMENT- CAPITAL ADEQUACY FRAMEWORK

INTRODUCTION
Bank capital is often defined in tiers or categories that include shareholders' equity, retained earnings, reserves, hybrid capital instruments, and subordinated term debt. Capital ratios are commonly measured as a percent of bank assets or risk-weighted bank assets.
Bank capital serves as an important cushion against unexpected losses. It creates a strong incentive to manage a bank in a prudent manner, because the bank owners’ equity is at risk in the event of a failure. Thus, bank capital plays a critical role in the safety and soundness of individual banks and the banking system.
Role of bank capital:


Source of funds
– Start-up costs
– Growth or expansion (mergers and acquisitions)
– Modernization costs



Cushion to absorb unexpected operating losses
– Insufficient capital to absorb losses will cause insolvency
– Long-term debt can only absorb losses in the event of institution failure



Adequate capital
– Regulatory requirements to promote bank safety and soundness
– Mitigate moral hazard problems of deposit insurance by increasing shareholders’ exposure to bank operating losses
– Market confidence is important to depositors and other bank claimants

Capital Adequacy
Capital Adequacy is the minimum amount of capital that a bank must hold to function effectively. It is a measure of financial strength and stability. It is usually expressed as a ratio of its capital to its assets. A ratio that can indicate a bank’s ability to maintain equity…...

Similar Documents

Basel 2

...Accountants of India - Batch 129 Basel II Implications on Indian Banks Group Members Rahul Sharma (ERO0097549) Abhishek Tulsyan (CRO0137558) Sikha Kedia (ERO0105399) Gourav Modi (ERO0016925) Praveen Didwania (ERO0110131) Index of Contents Topics Page No. I. Introduction A. B. C. D. E. F. G. Background Functions of Basel Committee The Evolution to Basel II – First Basel Accord Capital Requirements and Capital Calculation under Basel I Criticisms of Basel I New Approach to Risk Based Capital Structure of Basel II First Pillar : Minimum Capital Requirement Types of Risks under Pillar I The Second Pillar : Supervisory Review Process The Third Pillar : Market Discipline 3 3 3 3 3 4 4 II. The Three Pillar Approach A. B. C. D. 5 5 6 6 7 7 7 III. Capital Arbitrage and Core Effect of Basel II A. Capital Arbitrage B. Bank Loan Rating under Basel II Capital Adequacy Framework C. Effect of Basel II on Bank Loan Rating IV. Basel II in India A. Implementation C. Impact on Indian Banks D. Impact on Various Elements of Investment Portfolio of Banks E. Impact on Bad Debts and NPA’s of Indian Banks D. Government Policy on Foreign Investment E. Threat of Foreign Takeover 8 8 9 10 10 10 V. Conclusion A. SWOT Analysis of Basel II in Indian Banking Context B. Challenges going ahead under Basel II 11 11 13 13 VI. VII. References The Technical Paper Presentation Team 2 I. Introduction: A. Background Basel II is a new capital adequacy......

Words: 4743 - Pages: 19

Significance of Basel 1 & 2

...The Significance of Basel 1 and Basel 2 for the Future of The Banking Industry with Special Emphasis on Credit Information Abstract This paper examines the significance of Basel 1 and Basle 2 for the future of the banking industry. Both accords promote safety and soundness in the financial system with Basel 2 utilize approaches to capital adequacy that are appropriately sensitive to the degree of risk involved in a banks’ positions and activities. These approaches –and especially the one to measure credit risk- will require information from external credit assessment institution and information collected by banks about their borrowers creditworthiness. Maher Hasan Central Bank of Jordan To be presented in the Credit Alliance/ Information Alliance Regional Meeting in Amman 3-4 April 2002 1. Introduction The soundness of the banking system is one of the most important issues for the regulatory authorities. There are two main questions facing the regularity authorities regarding this issue: First, How should banking “soundness” be defined and measured? Second, What should be the minimum level of soundness set by regulators? The soundness of a bank can be defined as the likelihood of a bank becoming insolvent (Greenspan 1998). The lower this likelihood the higher is the soundness of a bank. Bank capital essentially provides a cushion against failure. If bank losses exceed bank capital the bank will become capital insolvent. Thus, the higher the bank capital the higher......

Words: 4670 - Pages: 19

Basel

...BASEL NORMS – BOON OR BANE? BY Pallabi ROY (PGDMB13/035) PRITAM SATHPATY (PGDMB13/077) SAGAR CHoUDHARY (PGDMB13/081) SHERIN MATHEWS (PGDMB13/049) SOHINI BANERJEE (PGDMB13/052) TUSHAR SHARMA (PGDMB13/086) table of contents TOPIC PAGE NO. 1. INTRODUCTION 1 2. Importance of Regulation of Bank Capital 2 3. BCBS : A Historical Background 3 4. BASEL I ACCORD 4 I. SALIENT FEATURES 5 II. ADVANTAGES OF BASEL I 9 III. SHORTCOMINGS OF BASEL I 11 5. baSEL II 13 I. from basel i to basel ii - the journey continues 13 II. OBJECTIVES 15 III. THE ACCORD IN OPERATION 15 IV. IMPACT OF BASEL II ON INDIA 26 a. IMPACT ON THE INDIAN BANKING SYSTEM 26 b. POSITIVE IMPACT 27 c. NEGATIVE IMPACT 29 V. Basel II and the global financial crisis 30 6. BASEL III 32 I. INTRODUCTION 32 II. OBJECTIVES 32 III. CHANGES MADE IN THE BASEL ACCORD 33 IV. COMPARISON OF CAPITAL REQUIREMENTS UNDER 39 BASEL II AND BASEL III V. macroeconomic impact of basel iii 40 A. Impact on Individual Banks 40 B. IMPACT ON THE FINANCIAL SYSTEM 40 C. impact of basel iii on the indian 42 banking system VI. RBI GUIDELINES 44 VII. CONCERNS WITH BASEL III 45 7. CONCLUSION ` 50 Introduction Banks......

Words: 12833 - Pages: 52

Basel

...BASEL III NORMS AND INDIAN BANKING: ASSESSMENT AND EMERGING CHALLENGES C.S.Balasubramaniam Professor, Babasaheb Gawde Institute of Management Studies, Mumbai Email: balacs2001@yahoo.co.in ABSTRACT Banking operations worldwide have undergone phenomenal changes in the last two decades since 1990s. Financial liberalization and technological innovations have created new and complex financial instruments/products have increased their role and turnover in financial markets and have rendered banking operations vulnerable to a variety of risks. The financial crisis episodes surfaced since 2006 have highlighted this paradox to a number of central banks operating in different countries and RBI and Indian banking sector is no exception to this phenomenon. Basel framework has been drawn by Bank for International Settlements (BIS) in consultation with supervisory authorities of banking sector in fifteen emerging market countries with the basic objective of advocating codes of bank supervision and promoting financial stability amidst economic crises. This research paper is divided in three parts .The opening part attempts to briefly describe the changes in the banking scenario since 1991 reforms and the necessity of introducing Basel III to the Indian Banking sector. Part II presents the Basel standards framework and explains why the transition from Basel II to Basel III norms has become necessary to bring in measures and safety standards which would equip the banks to become more......

Words: 5175 - Pages: 21

Companies in Basel

...------------------------------------------------- Finance * Baloise * Bank Coop * Bank Sarasin * Baumann & Cie * BiomedInvest * BIZ * BLKB * BKB * Helvetia Versicherungen * ITAG * La Roche & Co Banquiers * Nationale Suisse * Novartis Venture Fund * Pax * Remaco Merger * Sallfort * UBS * Versant Euroventures -------------------------------------------------   IT  * Berit * Cadwork * Canoo * E2E * Genedata * ii4sm * Meteoblue * sobees * SYNLOGIC ------------------------------------------------- Creative Industries * Art Basel * Art Basel Miami Beach * Ado Film TV Videoproduktion * BASELWORLD * Burckhardt + Partner * Favre-Leuba * Herzog & de Meuron * Lumess  * MCH Group * Tally Weijl * Galerie Beyeler / Fondation Beyeler * kunst in basel * Highlight Communications * Regent Beleuchtungskörper * Tonwerk Lausen * Vitra * Vitra Design Museum ------------------------------------------------- International Companies * Design Miami Internationally leading Design show from Miami, Florida. www.designmiami.com * Fossil European headquarters of American watch and accessory group. www.fossil.ch  * Agility European headquarters of global logistics company whose headquarters are in Kuwait. www.agilitylogistics.com * Divi’s Laboratories European branch of Indian manufacturer of......

Words: 406 - Pages: 2

Basel Rating

...About Ratings & Segments on IRB Approach João Pires da Cruz1 Introduction The Basel Committee on Banking Supervision, on the process of definition of the New Capital Accord, establishes a stepwise framework for regulatory capital allocation for credit risk, starting on what is designated as Standard Approach, in which banks must allocate capital according to regulatory rules, and finishing on what is designated as the Advanced IRB Approach, in which banks must allocate capital based on their own risk evaluation and on the committee guidelines for that evaluation. The committee defines several guidelines for the IRB Approach depending on the type of credit exposure but, technically, we can group the several lines of attach into two ways of deal with the credit portfolio, the rating approach, for the major exposures like banks, sovereigns and corporate; and the segmentation approach for retail and small business exposures. The most accepted credit risk frameworks are rating based models since, historically, the aim of the models was the bond market, the market of debt securities issued by stable corporations, banks and states. In this market, the assumption that a debt security is less risky than other debt security become the essence of the market, since debt issuers need to disclose information to lower the price of the debt security, affected by a risk premium over the interest rate. And the disclosed information includes rating agencies evaluations of financial figures...

Words: 2549 - Pages: 11

Basel

... Student’s Name: Instructor’s Name: Course Name & Code: Date of Submission: The Impact of Basel III on European Banking Sector As extensively anticipated, the oversight body of the Basel Committee declared on September 12 2010 that it has approved the capital and liquidity improvement package initially proposed in December 2009 and modified in July 2010, identified as Basel 3(Adrian B. W. 77). The Basel 3 package was recommended to ensure that the monetary system cannot experience the type of collapse and resulting economic slowdown that took place between 2007 and 2009. Even though the effects of the Basel 3 rules on an individual bank will depend on its asset/capital base and on the appropriate regulator's appliances of the rules, the publication of the standardized ratios and rules is one of the most important developments for banks ever since the disaster began. Banks can now concentrate on a future policy to meet the combined impacts of these rules (BCBS et al.). The Basel 3 rules that a bank should hold 4.5%of the common equity. This essentially consists of common shares in addition to retained earnings. The rules call for banks to have 4.5% of common equity (Kane, E.J 88). The total Tier 1 requirement rises from 4% to 6% under the rule. This implies that other forms of Tier 1 requirement will account for up to 1.5% of Tier 1 capital. The entire minimum capital requirements stand at 8%, subject to a new capital buffer. Nevertheless, 6% of capital has to be Tier 1,......

Words: 1767 - Pages: 8

Basel 3

...2.1 Components of Capital 2.1.1 Under the existing capital adequacy guidelines based on Basel II framework, total regulatory capital is comprised of Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Total regulatory capital should be at least 9% of risk weighted assets and within this, Tier 1 capital should be at least 6% of risk weighted assets. Within Tier 1 capital, innovative Tier 1 instruments are limited to 15% of Tier 1 capital. Further, Perpetual Non- Cumulative Preference Shares along with Innovative Tier 1 instruments should not exceed 40% of total Tier 1 capital at any point of time. Also, at present, Tier 2 capital cannot be more than 100% of Tier 1 capital and within Tier 2 capital, subordinated debt is limited to a maximum of 50% of Tier 1 capital. 2.1.2 Post crisis, with a view to improving the quality and quantity of regulatory capital, it has been decided that the predominant form of Tier 1 capital must be Common Equity; since it is critical that banks’ risk exposures are backed by high quality capital base. Non-equity Tier 1 and Tier 2 capital would continue to form part of regulatory capital subject to eligibility criteria as laid down in Basel III. Accordingly, under revised guidelines (Basel III), total regulatory capital will consist of the sum of the following categories: (i) Tier 1 Capital (going-concern capital2) (a) Common Equity Tier 1 (b) Additional Tier 1 (ii) Tier 2 Capital (gone-concern capital) 2.2...

Words: 298 - Pages: 2

Basel

...Basel Committee on Banking Supervision FIN 311 Bank Management and Turkish Banking System What is Basel Committee? An institution created in 1974 by central bank Governors from the Group of Ten nations. It has many of members come from Argentina, Turkey, Japan, Australia, Russia, the United Kingdom, United States, France, Germany, India and other countries. They meet four times a year at the Bank for International Settlements (BIS) in Basel, Switzerland. The role of the committee is that set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Additionally, the first contract was the Basel I. It was issued in 1988 and focused on credit risk by creating a bank asset classification system. The system has five risk categories. Some of those are; * 0% - cash, central bank and government debt and any OECD government debt * 0%, 10%, 20% or 50% - public sector debt * 20% - development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (under one year maturity) and non-OECD public sector debt, cash in collection * 50% - residential mortgages * 100% - private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and equipment, capital instruments issued at other banks. There is a significant point in this system, that the bank must maintain capital equal to at least 8% of its risk-weighted assets. I mean, if a bank has risk-weighted assets of $100 million,......

Words: 4137 - Pages: 17

Basel Iii

...Basel Committee on Banking Supervision reforms - Basel III Strengthens microprudential regulation and supervision, and adds a macroprudential overlay that includes capital buffers. Capital Pillar 1 Capital Quality and level of capital Greater focus on common equity. The minimum will be raised to 4.5% of riskweighted assets, after deductions. Capital loss absorption at the point of non-viability Contractual terms of capital instruments will include a clause that allows – at the discretion of the relevant authority – write-off or conversion to common shares if the bank is judged to be non-viable. This principle increases the contribution of the private sector to resolving future banking crises and thereby reduces moral hazard. Capital conservation buffer Comprising common equity of 2.5% of risk-weighted assets, bringing the total common equity standard to 7%. Constraint on a bank’s discretionary distributions will be imposed when banks fall into the buffer range. Countercyclical buffer Imposed within a range of 0-2.5% comprising common equity, when authorities judge credit growth is resulting in an unacceptable build up of systematic risk. Liquidity Pillar 2 Containing leverage Leverage ratio A non-risk-based leverage ratio that includes off-balance sheet exposures will serve as a backstop to the risk-based capital requirement. Also helps contain system wide build up of leverage. Pillar 3 Market discipline Revised Pillar 3 disclosures requirements The requirements......

Words: 792 - Pages: 4

Basel

...Basel II to Basel III: Changes and Requirements Hesham Hamdy Chief Risk Officer, Arab International Bank Nairobi, 7-8 March 2012 Basel; what is it? • A New Standard for the Measurement of Risks in Banks, and for the Allocation of Capital to cover those risks, published by the Basel Committee of G10 Central Banks. • What Does Basel Committee Do? - Acts as Think-Tank for banking regulators - Issues guidance on best practice for banks - Standards accepted worldwide - Generally incorporated in national banking regulations Basel I • Basel I was the round of deliberations by central banks from around the world, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks. This was known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992 . • Basel I primarily focused on credit risk. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Basel I (continued) • Banks with international presence were required to hold capital equal to 8 % of the risk-weighted assets. • Basel I was then widely viewed as outmoded because the world has changed as financial corporations, financial innovation and risk management have developed. Therefore, a more comprehensive set......

Words: 3834 - Pages: 16

Basel 2

...Belakang munculnya Basel II Basel I mengelompokkan nasabah ke dalam kelompok-kelompok yang menggambarkan tipe kesamaan debitur. Nasabah dengan tipe yang sama akan memiliki persyaratan modal yang sama tanpa memperhatikan perbedaan yang potensial pada kemampuan pembayaran kredit dan risiko yang dimiliki oleh masing-masing individu nasabah. Sejalan dengan banyaknya inovasi keuangan, dan produk-produk yang ada di dunia perbankan semakin berkembang, maka semakin banyak pula risiko risiko yang muncul. Dan risiko-risiko ini tidak diatur dalam Basel I, sehingga dikembangkanlah konsep permodalan dan risiko perbankan yang baru, yang lebih dikenal dengan Basel II. Tentang Basel II Basel II dibuat berdasarkan struktur dasar the Basel I. Basel II memberikan kerangka perhitungan modal yang bersifat lebih sensitif terhadap risiko serta memberikan insentif terhadap peningkatan kualitas penerapan manajemen risiko di bank. Hal ini dicapai dengan cara penyesuaian persyaratan modal dengan risiko dari kerugian kredit dan juga dengan memperkenalkan perubahan perhitungan modal dari eksposur yang disebabkan oleh risiko dari kerugian akibat kegagalan operasional. Basel II bertujuan meningkatkan keamanan dan kesehatan sistem keuangan, dengan menitikberatkan pada tiga pilar, yakni pilar pertama, perhitungan permodalan yang berbasis risiko; pilar kedua, supervisory review process; dan pilar ketiga, market discipline. Perbedaan Basel I dan Basel II [pic] Pilar-Pilar Basel......

Words: 4147 - Pages: 17

Basel Ii

...| Basel Consultative Group | European Banking Authority | European Commission | International Monetary Fund |   |   | Secretariat |   | Bank for International Settlements | 7.0 Appendix [Appendix (A): Basel Committee Membership, source: Bank for International Settlements (n.d.)] Risk Weight | Asset Class | 0% | Cash and gold held in bank.Obligation on OECD governments and U.S. treasuries | 20% | Securities issued by U.S. government agenciesClaims on OECD banks.Claims on municipalities. | 50% | Residential mortgages. | 100% | All other claims such as corporate bonds, less-developed countries’ debt, claims on non-OECD banks, equities, real estate, plant, and equipment. | [Appendix (B) Basel I classification of risk weights on balance sheet assets] Asset Category | Risk Weight | Capital Ratio | Amount | RWA | Minimal Capital Requirement | Treasury Bond | 0% | 8% | $10,000 | $0 | $0 | Municipal Bond | 20% | 8% | $10,000 | $2,000 | $160 | Residential Mortgage | 50% | 8% | $10,000 | $5,000 | $400 | Unsecured Loan | 100% | 8% | $10,000 | $10,000 | $800 | [Appendix (C) Example of the application of Basel I] [Appendix (D): Global Implementation Timelines, source: Yetis, 2008) 7.0 Reference List Alessi, C. (2012) The Basel Committee on Banking Supervision [Online]. Retrieved from: http://www.cfr.org/banks-and-banking/basel-committee-banking-supervision/p28694 [Accessed 8 March 2016]. Bank for International Settlements (n.d.) Basel......

Words: 1869 - Pages: 8

Basel Norms

...Basel I The Basel Accords are some of the most influential—and misunderstood—agreements in modern international finance. Drafted in 1988 and 2004, Basel I and II have ushered in a new era of international banking cooperation. Through quantitative and technical benchmarks, both accords have helped harmonize banking supervision, regulation, and capital adequacy standards across the eleven countries of the Basel Group and many other emerging market economies. On the other hand, the very strength of both accords—their quantitative and technical focus—limits the understanding of these agreements within policy circles, causing them to be misinterpreted and misused in many of the world’s political economies. Moreover, even when the Basel accords have been applied accurately and fully, neither agreement has secured long-term stability within a country’s banking sector. Therefore, a full understanding of the rules, intentions, and shortcomings of Basel I and II is essential to assessing their impact on the international financial system. This paper aims to do just that—give a detailed, non-technical assessment of both Basel I and Basel II, and for both developed and emerging markets, show the status, intentions, criticisms, and implications of each accord. Basel I Soon after the creation of the Basel Committee, its eleven member states (known as the G-10) began to discuss a formal standard to ensure the proper......

Words: 4711 - Pages: 19

Basel Ii

...The Basel II was proposed in 1999 as a more comprehensive capital adequacy accord, formally known as A Revised Framework on International Convergence of Capital Measurement and Capital Standards, and informally as “Basel II”. Each Pillar of Basil I was expanded to cover new approaches. A. Pillar I Known as Minimum Capital Requirements, Basel II creates a more sensitive measurement of a bank’s risk-weighted assets. It broadens the scope of regulation to include assets of the holding company of an internationally active bank to avoid the risk that a bank will “hide” risk-taking by transferring its assets to other subsidiaries. Basel II proposes three mutually exclusive methods. The first method, known as the Basic Indicator Approach, recommends that banks hold capital equal to fifteen percent of the average gross income earned by a bank in the past three years. Regulators are allowed to adjust the 15% number according to their risk assessment of each bank. The second method, known as the Standardized Approach, divides a bank by its business lines to determine the amount of cash it must have on hand to protect itself against operational risk. Each line is weighted by its relative size within the company to create the percentage of assets the bank must hold. The third method, the Advanced Measurement Approach is much more demanding for regulators and banks alike: it allows banks to develop their own reserve calculations for operational risks. Regulators, of course, must......

Words: 522 - Pages: 3