The Basel III rule introduced several measures to strengthen the capital requirement of banks across the globe and presented more capital buffers to supplement the risk-based minimum capital requirements. This is to ensure that adequate funding is maintained in case there are other severe banking crises.The Reserve Bank of India introduced Basel III norms in…
Three Pillars of Basel II accord: First Pillar of Basel II deals with maintenance of regulatory Capital calculated on three major risks the bankers are facing viz. Credit risk, Operation risk and Market risk. Second Pillar of Basel II deals with the regulatory answer to the first pillar, which enables the banks to review their…
(This post provides the risk weight table for on balance sheet and off-balance sheet category of assets) Updated on November 17: RBI increases risk weights on consumer credit exposure of banks, NBFCs to 125% from 100%. Measures announced to contain the risk emanating from a sharp rise in unsecured loans – mostly personal loans and…
In terms of Accounting Standard (AS) 11 FCTR or foreign currency translation reserve arises due to the translation of financial statements of bank’s foreign operations. FCTR is reckoned at a discount of 25% for the purpose of determining bank’s regulatory capital. The above treatment is subject to a condition that the FCTR are shown as…
The Capital of a bank is divided into different tiers according to the characteristics / qualities of each qualifying instrument. The Basel III framework tightens the capital requirements by limiting the type of capital into two categories viz. Tier I and Tier II for supervisory purposes of capital. The Tier II or Tier 2 capital…
Adequate capital is required by banks to absorb any losses that arise during the normal course of the bank’s operations. As per recommendations of Basel III capital requirements banks’ capital is split into two categories viz. Tier I and Tier II for supervisory purposes. Tier 1 capital is the term used to refer core component…
Sufficient capital is required by banks to absorb any losses that arise during the normal course of the bank’s operations. The Capital of a bank is divided into different tiers according to the characteristics / qualities of each qualifying instrument. The Basel III framework tightens the capital requirements by limiting the type of capital into…
A Deferred Tax Asset is an asset on an organisation’s balance sheet that may be used to reduce taxable income. The DTAs are associated with accumulated losses and other such assets. Such losses should be deducted in full from CET1 capital of the Banks. The Common Equity Tier 1 (CET1) is a component of Tier…
Value at risk is a statistic technique that measures and estimates the level of financial risk within an organization or investment portfolio or position over a specific time frame (holding period). The three major methods are used to calculate VaR are (i) Parametric Estimates (ii) Monte Carlo simulation (iii) Historical simulation. Parametric Estimates: The method…
This post elucidates Asset Liability Committee (ALCO) that evaluates the risk associated with Assets and Liability of banks, financial institutions and also the practice of managing risks that arise due to mismatches between the assets and liabilities known as Asset Liability Management (ALM). ALCO (Asset Liability Committee): A risk management committee in a bank that…