Capital to Risk (Weighted) Assets Ratio (CRAR) is also known as Capital adequacy Ratio, the ratio of a bank’s capital to its risk. The banking regulator tracks a bank’s CAR to ensure that the bank can absorb a reasonable amount of loss and complies with statutory Capital requirements. Higher CRAR indicates a bank is better…
A bank’s exposures to its counterparties may result in a concentration of its assets to a single counterparty or a group of connected counterparties. To address this concentration risk RBI has fixed limits on bank exposures to an individual business concern and to business concerns of a group. As per current guidelines of RBI a…
There are three types of capital viz. Regulatory capital, Book capital, and Economic capital. Regulatory capital is the amount of capital a bank is required to hold as per the stipulations prescribed by the banking regulator of the country. Book Capital is the actual capital that the bank has, which includes equity capital, loans, and…
The contingency planning is a regular part of risk management for exceptional risk though unlikely, may have disastrous consequences when an unexpected event or situation occurs. In the other words, contingency planning is a process that includes risk assessment and a mitigation strategy for those risks. It generally refers to a negative situation like direct…
The International Monetary Fund (IMF) defines funding liquidity as “the ability of a solvent institution to make agreed-upon payments in a timely fashion”. According to the IMF, funding liquidity is the ability lending agency agrees payment with immediacy. Funding liquidity is the availability of credit to finance the purchase of financial assets for a business…
Stress test is a process or simulation technique that evaluates an institutions reaction to different crisis situations. Stress testing and capital planning are increasingly linked to many risk management processes that require coordination across risk, treasury, and financial planning and analysis functions. Banks have been using stress tests to evaluate their potential vulnerability to certain…
In banking jargon the word ‘spread’ is used in issuance of corporate bonds,interest levied on loans and in foreign exchange transactions. In foreign exchange transactions the difference between the buying rate and selling rate is referred as spread or margin. The term ‘credit spread’ is used in the fixed income corporate bonds and bank loans.…
Risk management and capital Management are two sides of the same coin. Both of these indicate that the sufficient capital contribution in the business provides stable resources to help the owner to absorb any losses arising from the risks in a business. The objective of Capital management as well as its risk appetite is to…
The standardized approach for counterparty credit risk (SA-CCR) is a new computational method for exposure at default (EAD) under the Basel capital adequacy framework. This approach replaces the Current Exposure Method (CEM), used by banks in India, for measuring exposure for counterparty credit risk arising from derivative transactions, with effect from April 1, 2018. The…
The Current exposure method (CEM) is a measurement of the replacement cost within a derivative contract in the case of a counterparty default. Here, the credit equivalent amount of a market related off-balance sheet transaction calculated using the current exposure method which will be the sum of current credit exposure and potential future credit exposure…