Post on 05-Apr-2018
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Capital Adequacy
Prepared By:-
Sarang Bhatt
Dharmesh Patel
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Agenda
General overview of Capital adequacy
Capital adequacy from Template perspective
Cases of Capital adequacy
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What is CAR?
Capital adequacy ratio (CAR), also called Capital to Risk (Weighted)Assets Ratio (CRAR), is a ratio of a banks capital to its risk.
Capital adequacy ratios ("CAR") are a measure of the amount of a
bank's core capital expressed as a percentage of its risk-weightedasset.
Capital adequacy ratio is defined as
Total Regulatory CapitalCAR= --------------------------------
Risk weighted assets
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Use
Capital adequacy ratio is the ratio which determines the bank's
capacity to meet the time liabilities and other risks such
as Credit risk, Market risk, Operational risk, etc.
In the most simple formulation, a bank's capital is the "cushion" forpotential losses, and protects the bank's depositors and other
lenders.
Banking Regulators in most countries define and monitor CAR toprotect depositors, thereby maintaining confidence in the banking
system.
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Tier-I capital is thought to be more stable and more aligned with
the concept of capital as the funds that owners have invested in the
banks (i.e. equity capital, perpetual preferred stock and retained
earnings)
Tier-II capital are funds that protect depositors but may bewithdrawn (Long Term subordinated debt) or is already somewhat
committed to other purposes (Undisclosed Reserves, Revaluation
Reserves, General Provisions, Hybrid Debt Capital).
Tier-III capital is the Tertiary capital held by banks to meet part of
their market risks, that includes a greater variety of debt than tier 1
and tier 2 capitals. Tier 3 capital debts may include a greater
number of subordinated issues, undisclosed reserves and general.
Types of Capital
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Limits of Capital
Tier-I Capital:- No Limits
Tier-II Capital:- Limited to 100% of Tier-1 Capital
Tier-III Capital:- Limited to 250% of a banks tier-1 capital
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Depends on risk appetite of the bank, regulatory requirements,
maintaining a good debt rating, limits of internal growth, relative
cost of debt and equity financing.
Use statistical ratios to describe the risk appetite of banks.
How much Capital?
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Template
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General Terms
Transitional Floor:-
EBA ( European Banking Authority):- EBA acts as a hub and spoke
network of EU and national bodies safeguarding public values such
as the stability of the financial system, the transparency of markets
and financial products and the protection of depositors and
investors.
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Komercni Banka AS (KI-4145081)
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Volksbank International AG
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EFG Eurobank Ergasias SA
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All examples related to CA section
can be found at below link
http://snlspoint1/Content_Management/Financial_Content_
Mgmt/Euro_FIG/Audit%20Catch%20Examples_CA.aspx
http://snlspoint1/Content_Management/Financial_Content_Mgmt/Euro_FIG/Audit%20Catch%20Examples_CA.aspxhttp://snlspoint1/Content_Management/Financial_Content_Mgmt/Euro_FIG/Audit%20Catch%20Examples_CA.aspxhttp://snlspoint1/Content_Management/Financial_Content_Mgmt/Euro_FIG/Audit%20Catch%20Examples_CA.aspxhttp://snlspoint1/Content_Management/Financial_Content_Mgmt/Euro_FIG/Audit%20Catch%20Examples_CA.aspx