What is CET 1 capital?

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…

What is Value at Risk (VaR)?

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…

ALCO and ALM systems in banks explained

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…

How banks measure credit risk?

Credit risk measurement: Credit risk arises when a bank borrower or counter- party fails to meet his obligations according to specified schedule in terms of predetermined agreement either due to genuine problems or willful default. Banks are using two broad methodologies for computing their capital requirements for credit risk as per Basel II guidelines. First…

What is capital adequacy framework?

Adequate capital is required by banks to absorb any losses that arise during the normal course of the bank’s operations. Each Capital contribution/Equity contribution is a contribution of capital, in the form of money or property, to a business by an owner, partner, or shareholder.  The capital adequacy frame work in banking business emphasizes adequate…

Conversion of debt into equity by the Asset Reconstruction Companies reviewed

At present, the Asset Reconstruction companies viz. the Securitization Companies / Reconstruction Companies (SC/RCs) are permitted to convert a portion of debt into shares of the borrower company as a measure of asset reconstruction subject to a condition that their shareholding does not exceed 26% of the post converted equity of the company under reconstruction.…

What is risk management in agriculture?

Banks provide a number of credit facilities to customers engaged in activities related to agriculture. Many a time banks take the brunt when unforeseen disaster strikes the farmers in the form of ‘on-farm loss’ and or ‘off-farm losses.  These types of losses caused mainly due to production risk and price risk. The risk management in…