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Capital adequacy ratioFrom Wikipedia, the free encyclopediaJump to: navigation,search

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Capital adequacy ratio (CAR), also called Capital to Risk(Weighted) Assets Ratio(CRAR)[1], is a ratio of abank's capitalto its risk.National regulators track abank's CARto ensure that it can absorb a reasonable amount of loss [2] and are complying with theirstatutory Capital requirements.

Contents[hide]

1 Formula 2 Use 3 Risk weighting

o 3.1 Risk weighting example

4 Types of capital 5 See also 6 References 7 External links

[edit] Formula

This section or article contains too muchjargon and may need simplification or furtherexplanation.

Please discuss this issue on the talk page, and/or remove or explain jargon terms usedin the article. Editing help is available. (July 2007)

Capital adequacy ratios ("CAR") are a measure of the amount of a bank's capitalexpressed as apercentage of its riskweighted creditexposures.Capital adequacy ratio is defined aswhere Risk can either be weighted assets () or the respective national regulator'sminimum total capital requirement. If using risk weighted assets, 8%.[1]

The percent threshold (8% in this case, a common requirement for regulators conformingto the Basel Accords) is set by the national banking regulator.Two types ofcapital are measured: tier one capital (T1 above), which can absorb losseswithout abankbeing required to cease trading, and tier two capital(T2 above), which canabsorb losses in the event of a winding-up and so provides a lesser degree of protection todepositors.[edit] UseCapital adequacy ratio is the ratio which determines the capacity of the bank in terms ofmeeting the time liabilities and other risk such as credit risk, operational risk, etc. In themost simple formulation, a bank's capital is the "cushion" for potential losses, whichprotect the bank's depositors or other lenders. Banking regulators in most countries define

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and monitorCAR to protect depositors, thereby maintaining confidence in the bankingsystem.[1]

CAR is similar to leverage; in the most basic formulation, it is comparable to the inverseofdebt-to-equity leverage formulations (although CAR uses equity overassetsinstead ofdebt-to-equity; sinceassets are by definition equal to debt plusequity, a transformation is

required). Unlike traditional leverage, however, CAR recognizes that assets can havedifferent levels ofrisk.[edit] Risk weightingSince different types of assets have different risk profiles, CAR primarily adjusts forassets that are less risky by allowing banks to "discount" lower-riskassets. The specificsof CAR calculation vary from country to country, but general approaches tend to besimilar for countries that apply the Basel Accords. In the most basic application,governmentdebtis allowed a 0% "risk weighting" - that is, they are subtracted from totalassets for purposes of calculating the CAR.[edit] Risk weighting exampleLocal regulations establish that cash and government bonds have a 0% risk weighting,

andresidentialmortgage loans have a 50% risk weighting. All other types ofassets (loansto customers) have a 100% risk weighting.Bank "A"has assets totaling 100 units, consisting of:

Cash: 10 units. Government bonds: 15 units. Mortgage loans: 20 units. Otherloans: 50 units. Otherassets: 5 units.

Bank "A"has deposits of 95 units, all of which are deposits. By definition, equity is equalto assets minus debt, or 5 units.Bank A's risk-weighted assets are calculated as follows:

Cash 10 * 0% = 0Government bonds 15 * 0% = 0

Mortgage loans 20 * 50% = 10

Other loans 50 * 100% = 50

Other assets 5 * 100% = 5

Total risk

Weighted assets 65

Equity 5

CAR (Equity/RWA) 7.69%Even thoughBank "A"would appear to have a debt-to-equityratio of 95:5, orequity-to-assets of only 5%, its CAR is substantially higher. It is considered less riskybecausesome of its assets are less risky than others.[edit] Types of capitalThe Basel rules recognize that different types of equity are more important than others.To recognize this, different adjustments are made:

1. Tier I Capital: Actual contributed equity plus retained earnings.

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2. Tier II Capital: Preferred shares plus 50% ofsubordinated debt.Different minimum CAR ratios are applied: minimum Tier I equity to risk-weightedassets may be 4%, while minimum CAR including Tier II capitalmay be 8%.There is usually a maximum of Tier II capital that may be "counted" towards CAR,depending on thejurisdiction

Capital requirementFrom Wikipedia, the free encyclopedia

(Redirected from Capital requirements)Jump to: navigation,search

Contents

[hide] 1 Regulatory capital

o 1.1 Tier 1 (core) capital

o 1.2 Tier 2 (supplementary) capital

1.2.1 Undisclosed Reserves 1.2.2 Revaluation reserves 1.2.3 General provisions 1.2.4 Hybrid instruments 1.2.5 Subordinated-term debt

2 Different International Implementations 3 Common capital ratios

o 3.1 Example

4 See also 5 External links 6 References

The capital requirement is abank regulation, which sets a framework on howbanks anddepository institutions must handle theircapital. The categorization of assets and capitalis highly standardized so that it can be risk weighted. Internationally, the BaselCommittee on Banking Supervision housed at the Bank for International Settlementsinfluence each country's banking capital requirements. In 1988, the Committee decided tointroduce a capital measurement system commonly referred to as the Basel CapitalAccords (Basel Accord). This framework is now being replaced by a new andsignificantly more complex capital adequacy framework commonly known as Basel II.While Basel II significantly alters the calculation of the risk weights, it leaves alone thecalculation of the capital. The capital ratio is the percentage of a bank's capital to itsrisk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is

dictated under the relevant Accord.Each national regulator normally has a very slightly different way of calculating bankcapital, designed to meet the common requirements within their individual national legalframework. Brazil limits bank lending to 10 times the bank's capital, adjusted toinflation . Most developed countries and Basel I and II, stipulate lending limits as amultiple of a banks capital eroded by the yearly inflation rate.The 5 C's of Credit, Character, Cash Flow, Collateral, Conditions and Capital, have beensubstituted by one single criterion. While the international standards of bank capital were

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ipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Basel_Capital_Accordshttp://en.wikipedia.org/wiki/Basel_Capital_Accordshttp://en.wikipedia.org/wiki/Basel_Accordhttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Capital_adequacy_ratiohttp://en.wikipedia.org/wiki/Asset

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laid down in the 1988 Basel I accord, Basel II makes significant alterations to theinterpretation, if not the calculation, of the capital requirement.Examples of national regulators implementing Basel II include the FSA in the UK,BAFIN in Germany, and OSFIin Canada.An example of a national regulator implementing Basel I, but not Basel II, is in the

United States. Depository institutions are subject to risk-based capital guidelines issuedby the Board of Governors of the Federal Reserve System (FRB). These guidelines areused to evaluate capital adequacy based primarily on the perceived credit riskassociatedwithbalance sheet assets, as well as certain off-balance sheetexposures such asunfundedloan commitments, letters of credit, and derivatives and foreign exchange contracts. Therisk-based capital guidelines are supplemented by a leverage ratio requirement. To beadequately capitalized under federal bank regulatory agency definitions, a bank holdingcompany must have a Tier 1 capital ratio of at least 4%, a combined Tier 1 and Tier 2capital ratio of at least 8%, and a leverage ratio of at least 4%, and not be subject to adirective, order, or written agreement to meet and maintain specific capital levels. To bewell-capitalized under federal bank regulatory agency definitions, a bank holding

company must have a Tier 1 capital ratio of at least 6%, a combined Tier 1 and Tier 2capital ratio of at least 10%, and a leverage ratio of at least 5%, and not be subject to adirective, order, or written agreement to meet and maintain specific capital levels. Thesecapital ratios are reported quarterly on the Call Report orThrift Financial Report.[edit] Regulatory capital

In the Basel I accord bank capital was divided into two "tiers", each with somesubdivisions.[edit] Tier 1 (core) capital

Tier 1 capital, the more important of the two, consists largely of shareholders' equity.This is the amount paid up to originally purchase the stock (or shares) of the Bank (notthe amount those shares are currently trading for on the stock exchange), retained profitsand subtracting accumulated losses. In simple terms, if the original stockholderscontributed $100 to buy their stock and the Bank has made $10 in profits each year since,paid out no dividends and made no losses, after 10 years the Bank's tier one capital wouldbe $200.Regulators have since allowed several other instruments, other than common stock, tocount in tier one capital. These instruments are unique to each national regulator, but arealways close in nature to common stock. These are commonly referred to as upper tierone capital.[edit] Tier 2 (supplementary) capital

There are several classifications of tier 2 capital, which is composed of supplementarycapital. In the Basel I accord, these are categorized as undisclosed reserves, revaluationreserves, general provisions, hybrid instruments and subordinated term debt.[edit] Undisclosed Reserves

Undisclosed reserves are not common, but are accepted by some regulators where a Bankhas made a profit but this has not appeared in normal retained profits or in generalreserves. Most of the regulators do not allow this type of reserve because it does notreflect a true and fair picture of the results.[edit] Revaluation reserves

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A revaluation reserve is a reserve created when a company has an asset revalued and anincrease in value is brought to account. A simple example may be where a Bank owns theland and building of its headquarters and bought them for $100 a century ago. A currentrevaluation is very likely to show a large increase in value. The increase would be addedto a revaluation reserve.

[edit] General provisionsA general provision is created when a company is aware that a loss may have occurredbut is not sure of the exact nature of that loss. Under pre-IFRS accounting standards,general provisions were commonly created to provide for losses that were expected in thefuture. As these did not represent incurred losses, regulators tended to allow them to becounted as capital.[edit] Hybrid instruments

Hybrids are instruments that have some characteristics of both debt and shareholders'equity. Provided these are close to equity in nature, in that they are able to take losses onthe face value without triggering a liquidation of the Bank, they may be counted ascapital.

[edit] Subordinated-term debtSubordinated-term debt is debt that is not redeemable (it cannot be called upon to berepaid) for a set (usually long) term and ranks lower than (it will only be paid out after)ordinary depositors of the bank.[edit] Different International Implementations

Regulators in each country have some discretion on how they implement capitalrequirements in their jurisdiction.For example, it has been reported[1] that Australia'sCommonwealth Bankis measured ashaving 7.6% Tier 1 capital under the rules of the Australian Prudential RegulationAuthority, but this would be measured as 10.1% if the bank was under the jurisdiction ofthe UK's Financial Services Authority. This demonstrates that international differences inimplementation of the rule can vary considerably in their level of strictness.[edit] Common capital ratios

Tier 1 capital ratio = Tier 1 capital / Risk-adjusted assets >=6% Total capital (Tier 1 and Tier 2) ratio = Total capital (Tier 1 and Tier 2) / Risk-

adjusted assets >=10% Leverage ratio = Tier 1 capital / Average total consolidated assets >=5% Common stockholders equity ratio = Common stockholders equity / Balance

sheet assets[edit] Example

Listed below are the capital ratios inCitigroup at the end of 2003 [1].

Ratios

At year-end 2003

Tier 1 capital 8.91%

Total capital (Tier 1 and Tier 2) 12.00%

Leverage (1) 5.56%

Common stockholders equity 7.67%

(1) Tier 1 capital divided by adjusted average assets.

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Components of Capital Under Regulatory Guidelines

In millions of dollars at year-end 2003

Tier 1 capital

Common stockholders equity $ 96,889

Qualifying perpetual preferred stock 1,125

Qualifying mandatorily redeemable securities of subsidiary trusts 6,257

Minority interest 1,158

Less: Net unrealized gains on securities available-for-sale (1) (2,908)

Accumulated net gains on cash flow hedges, net of tax (751) (1,242) (751)

Intangible assets: (2)

Goodwill (27,581)

Other disallowed intangible assets (6,725)

50% investment in certain subsidiaries (3) (45)

Other (548)

Total Tier 1 capital 66,871

Tier 2 capital

Allowance for credit losses (4) 9,545

Qualifying debt (5) 13,573

Unrealized marketable equity securities gains (1) 399

Less: 50% investment in certain subsidiaries (3) (45)

Total Tier 2 capital 23,472

Total capital (Tier 1 and Tier 2) $ 90,343

Risk-adjusted assets (6) $750,293

(1) Tier 1 capital excludes unrealized gains and losses on debt securities available-for-sale in accordance with regulatory risk-based capital guidelines. The federal bankregulatory agencies permit institutions to include in Tier 2 capital up to 45% of pretax netunrealizedholding gains on available-for-sale equity securities with readily determinablefair values. Institutions are required to deduct from Tier 1 capital net unrealized holdinglosses on available-for-sale equity securities with readily determinable fair values, net of

tax.(2) The increase in intangible assets is primarily due to the acquisition of the Sears creditcard portfolio in November 2003.(3) Represents unconsolidated banking and finance subsidiaries.(4) Includable up to 1.25% of risk-adjusted assets. Any excess allowance is deductedfrom risk-adjusted assets.(5) Includes qualifying subordinated debt in an amount not exceeding 50% of Tier 1capital.

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(6) Includes risk-weighted credit equivalent amounts, net of applicable bilateral nettingagreements, of $39.1 billion for interest rate, commodity and equity derivative contractsand foreign exchange contracts, as of December 31, 2003, compared to $31.5 billion as ofDecember 31, 2002. Market risk-equivalent assets included in risk-adjusted assetsamounted to $40.6 billion and $30.6 billion at December 31, 2003 and 2002, respectively.

Risk-adjusted assets also includes the effect of other off-balance sheet exposures suchas unused loan commitments and letters of credit and reflects deductions for certainintangible assets and any excess allowance for credit losses

Tier 1 capitalFrom Wikipedia, the free encyclopediaJump to: navigation,search

This article does not cite any references or sources.

Please help improve this article by adding citations to reliable sources. Unverifiablematerial may be challenged and removed. (April 2008)

Tier 1 capital, also known as core capital,[1] is the core measure of a bank's financialstrength from a regulator's point of view. It consists primarily of equity capital and cashreserves, but may also include irredeemable non-cumulative preferred stockand retainedearnings.Capital in this sense is related to, but different from, the accounting concept ofshareholder's equity. Both tier 1 and tier 2 capital were first defined in the Basel I capitalaccord and remained substantially the same in the replacementBasel II accord.Each country's banking regulator, however, has some discretion over how differingfinancial instruments may count in a capital calculation. This is appropriate, as the legalframework varies in different legal systems.The theoretical reason for holding capital is that it should provide protection againstunexpected losses. Note that this is not the same as expected losses which are covered byprovisions, reserves and current year profits.The Tier 1 capital ratio is the ratio of a bank's coreequity capital to its total risk-weightedassets. Risk-weighted assets are the total of all assets held by the bank which areweighted for credit risk according to a formula determined by the Regulator (usually thecountry's Central Bank). Most central banksfollow the Bank of International Settlements(BIS) guidelines in setting formulae for asset risk weights. Assets like cash and coinsusually have zero risk weight, while debenturesmight have a risk weight of 100%.A good definition of Tier I capital is that it includes equity capital and disclosed reserves,where equity capital includes instruments that can't be redeemed at the option of theholder (meaning that the owner of the shares cannot decide on his own that he wants towithdraw the money he invested and so cannot leave the bank without the risk coverage).Reserves are, as they are held by the bank, by their nature not an amount of money onwhich anybody but the bank can have an influence on.Tier 1 capital is also seen as a metric of a bank's ability to sustain future losses. InOctober 2008,[2] a number of British banks have seen an erosion of their marketcapitalization due of their lower Tier 1 capital. In order to boost the Tier 1 capital of thesebanks and restore confidence in the banking system, the UK Treasury has decided to part-nationalise the UK banks. The plan will allow seven banks, Abbey, Barclays, HBOS,

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HSBC,Lloyds TSB, Royal Bank of Scotland and Standard Chartered and theNationwideBuilding Society to apply for an initial amount of 25bn in permanent capital. TheTreasury may possibly impose conditions on executive compensation and dividend cutsfrom the banks. This capital is expected to come in the form of preference shares or otherpermanent interest bearing shares

Tier 2 capitalFrom Wikipedia, the free encyclopediaJump to: navigation,searchTier 2 capital is a measure of a bank's financial strength with regard to the second mostreliable form offinancial capital, from a regulator's point of view. The forms of bankingcapital were largely standardised in the Basel I accord, issued by theBasel Committee onBanking Supervision and left untouched by the Basel II accord. National regulators ofmost countries around the world have implemented these standards in local legislation.Tier 1 capital is considered the more reliable form of capital.

There are several classifications of tier 2 capital. In the Basel I Accord, tier 2 capital iscomposed of supplementary capital, which is categorised as undisclosed reserves,revaluation reserves, general provisions, hybrid instruments and subordinated term debt.Supplementary capital can be considered tier 2 capital up to an amount equal to that ofthe core capital.[1]

Contents

[hide] 1 Undisclosed Reserves 2 Revaluation Reserves 3 General Provisions 4 Hybrid Instruments 5 Subordinated Term Debt 6 See also 7 References 8 External links

[edit] Undisclosed Reserves

Undisclosed reserves are not common, but are accepted by some regulators where a bankhas made a profit but this has not appeared in normal retained profits or in generalreserves of the bank.[edit] Revaluation Reserves

A revaluation reserve is a reserve created when a company has an asset revalued and anincrease in value is brought to account. A simple example may be where a bank owns the

land and building of its head-offices and bought them for $100 a century ago. A currentrevaluation is very likely to show a large increase in value. The increase would be addedto a revaluation reserve.[edit] General Provisions

A general provision is created when a company is aware that a loss may have occurredbut is not sure of the exact nature of that loss. Under pre-IFRS accounting standards,general provisions were commonly created to provide for losses that were expected in the

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future. As these did not represent incurred losses, regulators tended to allow them to becounted as capital.[edit] Hybrid Instruments

Hybrids are instruments that have some characteristics of both debt and shareholders'equity. Provided these are close to equity in nature, in that they are able to take losses on

the face value without triggering a liquidation of the bank, they may be counted ascapital. Preferred stocks are hybrid instruments.[edit] Subordinated Term Debt

Subordinated debt is debt that ranks lower than ordinary depositors of the bank.

Subordinated debtFrom Wikipedia, the free encyclopediaJump to: navigation,searchIn finance, subordinated debt (also known as subordinated loan, subordinated bond,

subordinated debenture or junior debt) is debt which ranks after other debts should acompany fall into receivershipor be closed.Such debt is referred to as subordinate, because the debt providers (the lenders) havesubordinate status in relationship to the normal debt. A typical example for this would bewhen a promoter of a company invests money in the form of debt, rather than in the formof stock. In the case of liquidation (e.g. the company winds up its affairs and dissolves)the promoter would be paid just before stockholders -- assuming there are assets todistribute after all other liabilities and debt has been paid.Subordinated debt has a lower priority than other bonds of the issuer in case ofliquidation during bankruptcy, below the liquidator, government tax authorities andsenior debt holders in the hierarchy of creditors. Because subordinated debt is repayable

after other debts have been paid, they are more risky for the lender of the money. It isunsecured and has lesser priority than that of an additional debt claim on the same asset.Subordinated loans typically have a higher rate of return than senior debt due to theincreased inherent risk. Accordingly, majorshareholdersandparent companies are mostlikely to provide subordinated loans, as an outside party providing such a loan wouldnormally want compensation for the extra risk.Subordinated bonds usually have a lower credit rating than senior bonds. Here are acouple examples for subordinated bonds. First of all, the main example of subordinatedbonds can be found in bonds issued by banks. Subordinated debt is issued by most largebanking corporations in the U.S. periodically. It is believed that subordinated notes arerisk-sensitive. That is, subordinated debt holders have claims on bank assets after senior

debtholders and they lack the upside gain enjoyed by shareholders. This status ofsubordinated debt makes it perfect for experimenting on the significance of marketdiscipline. This can be accomplished in two separate ways. First, a simple look atsecondary market prices of subordinated debt would suffice. Second, one can have a lookat issue price of these bonds initially in the primary markets.For a second example for subordinated bond, consider asset-backed securities. These areoften issued in tranches. The senior tranches get paid back first, the subordinated trancheslater. Finally, Mezzanine debt is another example of subordinated debt.

http://en.wikipedia.org/w/index.php?title=Tier_2_capital&action=edit&section=4http://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Shareholders'_equityhttp://en.wikipedia.org/wiki/Shareholders'_equityhttp://en.wikipedia.org/wiki/Liquidationhttp://en.wikipedia.org/wiki/Liquidationhttp://en.wikipedia.org/wiki/Preferred_stockhttp://en.wikipedia.org/w/index.php?title=Tier_2_capital&action=edit&section=5http://en.wikipedia.org/wiki/Subordinated_debthttp://en.wikipedia.org/wiki/Subordinated_debt#column-one%23column-onehttp://en.wikipedia.org/wiki/Subordinated_debt#column-one%23column-onehttp://en.wikipedia.org/wiki/Subordinated_debt#searchInput%23searchInputhttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Receivershiphttp://en.wikipedia.org/wiki/Receivershiphttp://en.wikipedia.org/wiki/Liquidationhttp://en.wikipedia.org/wiki/Bankruptcyhttp://en.wikipedia.org/wiki/Bankruptcyhttp://en.wikipedia.org/wiki/Liquidator_(law)http://en.wikipedia.org/wiki/Liquidator_(law)http://en.wikipedia.org/wiki/Liquidator_(law)http://en.wikipedia.org/wiki/Seniority_(finance)http://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Parent_companieshttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Market_disciplinehttp://en.wikipedia.org/wiki/Market_disciplinehttp://en.wikipedia.org/wiki/Trancheshttp://en.wikipedia.org/wiki/Trancheshttp://en.wikipedia.org/wiki/Mezzanine_financehttp://en.wikipedia.org/w/index.php?title=Tier_2_capital&action=edit&section=4http://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Shareholders'_equityhttp://en.wikipedia.org/wiki/Shareholders'_equityhttp://en.wikipedia.org/wiki/Liquidationhttp://en.wikipedia.org/wiki/Preferred_stockhttp://en.wikipedia.org/w/index.php?title=Tier_2_capital&action=edit&section=5http://en.wikipedia.org/wiki/Subordinated_debthttp://en.wikipedia.org/wiki/Subordinated_debt#column-one%23column-onehttp://en.wikipedia.org/wiki/Subordinated_debt#searchInput%23searchInputhttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Receivershiphttp://en.wikipedia.org/wiki/Liquidationhttp://en.wikipedia.org/wiki/Bankruptcyhttp://en.wikipedia.org/wiki/Liquidator_(law)http://en.wikipedia.org/wiki/Seniority_(finance)http://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Parent_companieshttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Market_disciplinehttp://en.wikipedia.org/wiki/Market_disciplinehttp://en.wikipedia.org/wiki/Trancheshttp://en.wikipedia.org/wiki/Mezzanine_finance

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Subordinated bonds are regularly issued (as mentioned earlier) as part of thesecuritization of debt, such as asset-backed securities,collateralized mortgage obligationsor collateralized debt obligations. Corporate issuers tend to prefer not to issuesubordinated bonds because of the higher interest rate required to compensate for thehigher risk, but may be forced to do so if indentures on earlier issues mandate their status

as senior bonds. Also, subordinated debt may be combined withpreferred stockto createso called monthly income preferred stock, a hybrid securitypaying dividends for thelender and funded as interest expense by the issuer.

Basel AccordFrom Wikipedia, the free encyclopedia

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Basel II

Bank for International SettlementsBasel Accord - Basel IBasel II

Background

BankingMonetary policy - Central bankRisk - Risk managementRegulatory capitalTier 1- Tier 2

Pillar 1: Regulatory Capital

Credit risk Standardized - F-IRB - A-IRBPD - LGD - EADOperational risk Basic - Standardized - AMAMarket risk Duration - Value at risk

Pillar 2: Supervisory Review

Economic capital

Liquidity risk- Legal risk

Pillar 3: Market Disclosure

Disclosure

Business and Economics Portal

The Basel Accord(s) or Basle Accord(s) (see spelling section below) refers to the bankingsupervision Accords (recommendations on banking laws and regulations), Basel I and

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Basel II issued by the Basel Committee on Banking Supervision (BCBS). They are calledthe Basel Accords as the BCBS maintains its secretariat at the Bank of InternationalSettlements in Basel, Switzerlandand the committee normally meets there.

Contents[hide]

1 The Basel Committee 2 Spelling 3 See also 4 References

[edit] The Basel CommitteeThe Basel Committee consists of representatives from central banks and regulatoryauthorities of the Group of Ten (economic) countries, plus others (specificallyLuxembourg and Spain). The committee does not have the authority to enforcerecommendations, although most member countries (and others) tend to implement theCommittee's policies. This means that recommendations are enforced through national(or EU-wide) laws and regulations, rather than as a result of the committee's

recommendations - thus some time may pass between recommendations andimplementation as law at the national level.[edit] SpellingThe Basel Committee is named after the Swiss town of Basel. In early publications, thecommittee sometimes used the English spelling "Basle" or the French spelling "Ble,"names that are sometimes still used in the press. More recently, the Committee hasdeferred to the predominantly German population of the region and used the spelling"Basel."

Basel IFrom Wikipedia, the free encyclopedia

Jump to: navigation,searchBasel I is the round of deliberations by central bankers from around the world, and in1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimalcapital requirements for banks. This is also known as the 1988 Basel Accord, and wasenforced by law in the Group of Ten (G-10) countries in 1992, with Japanese bankspermitted an extended transition period. Basel I is now widely viewed as outmoded, and amore comprehensive set of guidelines, known as Basel II are in the process ofimplementation by several countries.[edit] BackgroundThe Committee was formed in response to the messy liquidation of a Cologne-basedbank in 1974. On 26 June 1974, a number of banks had released Deutschmark to the

Bank Herstatt in exchange for dollar payments deliverable in New York. On account ofdifferences in the time zones, there was a lag in the dollar payment to the counter-partybanks, and during this gap, and before the dollar payments could be effected in NewYork, the Bank Herstatt was liquidated by German regulators.This incident prompted the G-10 nations to form towards the end of 1974, the BaselCommittee on Banking Supervision, under the auspices of the Bank of InternationalSettlements (BIS) located in Basel,Switzerland.[edit] Main framework

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Basel I, that is, the 1988 Basel Accord, primarily focused on credit risk. Assets of bankswere classified and grouped in five categories according to credit risk, carrying riskweights of zero (for example home country sovereign debt), ten, twenty, fifty, and up toone hundred percent (this category has, as an example, most corporate debt). Banks withinternational presence are required to hold capital equal to 8 % of the risk-weighted

assets.Since 1988, this framework has been progressively introduced in member countries of G-10, currently comprising 13 countries, namely, Belgium,Canada,France, Germany, Italy,Japan, Luxemburg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and theUnited States of America.Most other countries, currently numbering over 100, have also adopted, at least in name,the principles prescribed under Basel I. The efficiency with which they are enforcedvaries, even within nations of the Group of Ten.

Basel II AccordFrom Wikipedia, the free encyclopedia

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Basel II

Bank for International SettlementsBasel Accord - Basel IBasel II

Background

Banking

Monetary policy - Central bankRisk - Risk managementRegulatory capitalTier 1- Tier 2

Pillar 1: Regulatory Capital

Credit risk Standardized - F-IRB - A-IRBPD - LGD - EADOperational risk Basic - Standardized - AMA

Market risk Duration - Value at risk

Pillar 2: Supervisory Review

Economic capitalLiquidity risk- Legal risk

Pillar 3: Market Disclosure

http://en.wikipedia.org/wiki/Credit_riskhttp://en.wikipedia.org/wiki/Sovereign_debthttp://en.wikipedia.org/wiki/Belgiumhttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Luxemburghttp://en.wikipedia.org/wiki/Netherlandshttp://en.wikipedia.org/wiki/Netherlandshttp://en.wikipedia.org/wiki/Spainhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_States_of_Americahttp://en.wikipedia.org/w/index.php?title=Basel_II&redirect=nohttp://en.wikipedia.org/wiki/Basel_II#column-one%23column-onehttp://en.wikipedia.org/wiki/Basel_II#column-one%23column-onehttp://en.wikipedia.org/wiki/Basel_II#searchInput%23searchInputhttp://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Basel_Accordhttp://en.wikipedia.org/wiki/Basel_Ihttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Regulatory_capitalhttp://en.wikipedia.org/wiki/Tier_1_capitalhttp://en.wikipedia.org/wiki/Tier_1_capitalhttp://en.wikipedia.org/wiki/Tier_2_capitalhttp://en.wikipedia.org/wiki/Credit_riskhttp://en.wikipedia.org/wiki/Standardized_approach_(credit_risk)http://en.wikipedia.org/wiki/Foundation_IRBhttp://en.wikipedia.org/wiki/Foundation_IRBhttp://en.wikipedia.org/wiki/Foundation_IRBhttp://en.wikipedia.org/wiki/Advanced_IRBhttp://en.wikipedia.org/wiki/Probability_of_defaulthttp://en.wikipedia.org/wiki/Loss_given_default_(LGD)http://en.wikipedia.org/wiki/Exposure_at_default_(EAD)http://en.wikipedia.org/wiki/Operational_riskhttp://en.wikipedia.org/wiki/Basic_indicator_approachhttp://en.wikipedia.org/wiki/Standardized_approach_(operational_risk)http://en.wikipedia.org/wiki/Advanced_measurement_approachhttp://en.wikipedia.org/wiki/Advanced_measurement_approachhttp://en.wikipedia.org/wiki/Market_riskhttp://en.wikipedia.org/wiki/Durationhttp://en.wikipedia.org/wiki/Value_at_riskhttp://en.wikipedia.org/wiki/Economic_capitalhttp://en.wikipedia.org/wiki/Liquidity_riskhttp://en.wikipedia.org/wiki/Legal_riskhttp://en.wikipedia.org/wiki/Credit_riskhttp://en.wikipedia.org/wiki/Sovereign_debthttp://en.wikipedia.org/wiki/Belgiumhttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Luxemburghttp://en.wikipedia.org/wiki/Netherlandshttp://en.wikipedia.org/wiki/Spainhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_States_of_Americahttp://en.wikipedia.org/w/index.php?title=Basel_II&redirect=nohttp://en.wikipedia.org/wiki/Basel_II#column-one%23column-onehttp://en.wikipedia.org/wiki/Basel_II#searchInput%23searchInputhttp://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Basel_Accordhttp://en.wikipedia.org/wiki/Basel_Ihttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Regulatory_capitalhttp://en.wikipedia.org/wiki/Tier_1_capitalhttp://en.wikipedia.org/wiki/Tier_2_capitalhttp://en.wikipedia.org/wiki/Credit_riskhttp://en.wikipedia.org/wiki/Standardized_approach_(credit_risk)http://en.wikipedia.org/wiki/Foundation_IRBhttp://en.wikipedia.org/wiki/Advanced_IRBhttp://en.wikipedia.org/wiki/Probability_of_defaulthttp://en.wikipedia.org/wiki/Loss_given_default_(LGD)http://en.wikipedia.org/wiki/Exposure_at_default_(EAD)http://en.wikipedia.org/wiki/Operational_riskhttp://en.wikipedia.org/wiki/Basic_indicator_approachhttp://en.wikipedia.org/wiki/Standardized_approach_(operational_risk)http://en.wikipedia.org/wiki/Advanced_measurement_approachhttp://en.wikipedia.org/wiki/Market_riskhttp://en.wikipedia.org/wiki/Durationhttp://en.wikipedia.org/wiki/Value_at_riskhttp://en.wikipedia.org/wiki/Economic_capitalhttp://en.wikipedia.org/wiki/Liquidity_riskhttp://en.wikipedia.org/wiki/Legal_risk

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Disclosure

Business and Economics Portal

This article or section is missing information about: the global financial crisis and how Basel II relates to it..

This concern has been noted on the talk page where it may be discussed whether or notto include such information. (November 2008)

This article or section includes a list of references or external links, but its sourcesremain unclear because it lacks inline citations.You can improve this article by introducing more precise citationswhere appropriate.(April 2008)

Basel II is the second of the Basel Accords, which are recommendations on banking lawsand regulations issued by the Basel Committee on Banking Supervision. The purpose ofBasel II, which was initially published in June 2004, is to create an international standardthat banking regulators can use when creating regulations about how much capital banks

need to put aside to guard against the types of financial and operational risks banks face.Advocates of Basel II believe that such an international standard can help protect theinternational financial system from the types of problems that might arise should a majorbank or a series of banks collapse. In practice, Basel II attempts to accomplish this bysetting up rigorous risk and capital management requirements designed to ensure that abank holds capital reserves appropriate to the risk the bank exposes itself to through itslending and investment practices. Generally speaking, these rules mean that the greaterrisk to which the bank is exposed, the greater the amount of capital the bank needs tohold to safeguard its solvencyand overall economic stability.The final version aims at:

1. Ensuring that capital allocation is more risk sensitive;2. Separating operational riskfrom credit risk, and quantifying both;3. Attempting to align economic and regulatory capital more closely to reduce the

scope forregulatory arbitrage.While the final accord has largely addressed the regulatory arbitrage issue, there are stillareas where regulatory capital requirements will diverge from the economic.Basel II has largely left unchanged the question of how to actually define bank capital,which diverges from accountingequity in important respects. The Basel I definition, asmodified up to the present, remains in place.

Contents[hide]

1 The Accord in operationo 1.1 The first pillar

o 1.2 The second pillar

o 1.3 The third pillar

2 September 2005 update 3 November 2005 update 4 July 2006 update 5 November 2007 update 6 July 16, 2008 update

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8/6/2019 Basel Norm

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7 Basel II and the regulatorso 7.1 Implementation progress

8 See also 9 References 10 External links

[edit] The Accord in operationBasel II uses a "three pillars" concept (1) minimum capital requirements (addressingrisk), (2) supervisory review and (3) market discipline to promote greater stability inthe financial system.The Basel I accord dealt with only parts of each of these pillars. For example: withrespect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simplemanner while market risk was an afterthought; operational risk was not dealt with at all.[edit] The first pillarThe first pillar deals with maintenance of regulatory capital calculated for three majorcomponents of risk that a bank faces: credit risk, operational riskand market risk. Otherrisks are not considered fully quantifiable at this stage.

The credit riskcomponent can be calculated in three different ways of varying degree ofsophistication, namely standardized approach,Foundation IRB and Advanced IRB. IRBstands for "Internal Rating-Based Approach".Foroperational risk, there are three different approaches - basic indicator approach orBIA, standardized approachor TSA, and advanced measurement approach or AMA.Formarket riskthe preferred approach is VaR (value at risk).[edit] The second pillarThe second pillar deals with the regulatory response to the first pillar, giving regulatorsmuch improved 'tools' over those available to them under Basel I. It also provides aframework for dealing with all the other risks a bank may face, such as systemic risk,pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal

risk, which the accord combines under the title of residual risk.It gives bank a power toreview their risk management system.[edit] The third pillarThe third pillar greatly increases the disclosures that the bank must make. This isdesigned to allow the market to have a better picture of the overall risk position of thebank and to allow the counterpartiesof the bank to price and deal appropriately.[edit] September 2005 updateOn September 30, 2005, the four US Federal banking agencies (the Office of theComptroller of the Currency, theBoard of Governors of the Federal Reserve System, theFederal Deposit Insurance Corporation, and the Office of Thrift Supervision) announcedtheir revised plans for the U.S. implementation of the Basel II accord. This delays

implementation of the accord for US banks by 12 months[1].[edit] November 2005 updateOn November 15, 2005, the committee released a revised version of the Accord,incorporating changes to the calculations for market risk and the treatment of doubledefault effects. These changes had been flagged well in advance, as part of a paperreleased in July 2005. [2][edit] July 2006 update

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