Capital Adequacy - Basel II Accord

7/31/2019 Capital Adequacy - Basel II Accord.

1/55

Basel II Framework


2/55

Capital Requirement In Banks One of the important parameters to assess the financial

strength of any business is its Capital or Net Worth. Bankingbusiness is no exception to this rule.

The issue of what should be the minimum capital requirementof a banking company had been engaging the attention ofregulators in many countries . Till late 1970s, there were no set

or standard guidelines in this regard. The Governors of the central banks of G-10 countries

constituted a Committee of Banking Supervisory Authoritiesin 1975. This Committee usually meets at the Bank forInternational Settlements at Basel in Switzerland and hencehas come to be known over the years as the Basel Committeeon Banking Supervision (BCBS).

The Basel Committee provided for the first time a frameworkfor capital adequacy in 1988 which is known as Basel I Accord.


3/55

Basel I Accord The norms for Capital Adequacy used to differ from bank

to bank and from country to country.

Japanese banks used to consider capital to the extent of 1 to2% of the assets as adequate.

Banks in Europe used to require 8 to 10% of their assets as

capital. The Basel Committee addressed the issue of

standardization in this regard and provided the requisiteframework.

It defined the components of capital, allotted risk weightsto the different classes of assets and prescribed whatshould be the minimum ratio of capital to sum total of allrisk weighted assets.


4/55

Basel I Accord ( continued ) The Basel I norms for risk weights were more of a rudimentary

nature. For example,i) All exposures to sovereigns were assigned a risk weight ofzero.

ii) All bank exposures were assigned a risk weight of 20%, and

iii) All corporate exposure were assigned a risk weight of 100%,etc.

Such a rigid approach without any consideration for thestrengths or weaknesses of individual entities was the main

shortcoming of the Basel I Accord. The fact that an excellentcorporate like L&T could have a lesser risk weight than even aweak bank was not recognized under Basel I.

Basel I Accord continued to be operative for about 15 yearswith some periodic modifications , but came for a totaloverhaul and review towards the end of the 20th century.


5/55

Birth Of Basel II Accord The first round of proposals for changes in Basel I accord

came up for deliberations and consultative process in June 99. An extensive consultative process was initiated and banking

supervisors from across the world were roped into the exercise.

After 5 years of deliberations, the revised framework for capital

adequacy was finalised in June 2004 with the approval of allthe 10 members of the G-10 Committee.

The report of the Committee is titled as INTERNATIONALCONVERGENCE OF CAPITAL MEASUREMENT AND

CAPITAL STANDARDS A REVISED FRAMEWORK. The Committee desired the revised framework be put in place

by the end of 2006.In India, the parallel runs commenced inApril 2006 and implementation has been completed by 31-3-2008 by foreign banks and Indian banks having internationaloperations and by 31-3-2009 by other banks.


6/55

Main Features Of Basel II Accord The fundamental objective of Basel II accord was to revise the

Basel I accord in order to strengthen the soundness andstability of the system.

The intention of Basel II is to promote sound risk managementpractices by Banks.

It demands allocation of capital for Operational Risk for thefirst time.

The Basel II accord is expected to establish a minimum level ofcapital for internationally active banks.

National regulators are free to set higher standards forminimum capital if they so desire.

In India, the CRAR requirement is set at 10% forinternationally active banks and 9% for other banks, of which

Tier I Capital should be at least 6% and balance can be Tier IICapital.


7/55

What are Tier I Capital items? Tier I Capital consists of the following

1) Equity and Preference Capital,

2) Reserves and Surplus ( including StatutoryReserves, Capital Reserves and Retained profits kept

in the P & L Account). General Reserves and SharePremium also come under this category and allthese items of reserves are collectively known asDisclosed Reserves.

3) Innovative Perpetual Debt Instruments (IPDI s) These are long term debt instruments of maturitymore than 10 years issued by the Bank in domestic

as well as international markets.


8/55

What are Tier II Capital Items? Tier II Capital consists of the following items

1) Revaluation Reserves,

2) Undisclosed reserves,3) Exchange Equalization Reserves on Current Assets,

4) General Provision and reserves to the extent permitted bythe Regulatory Authorities, presently 1.25% of risk weighted

assets,5) Hybrid Instruments having the debt and equity

characteristics,

6) Subordinated Debts, which are debt instruments with a

maturity of 5 to 15 years and should not exceed 50% of Tier ICapital,

7) Investment Fluctuation Reserves, and

8) General Provision for Standard Assets.

Tier II Capital is restricted to 100% of Tier I Capital.


9/55

Main Features Of Basel II (cont) The new capital accord will require banks to manage risks by

not only allocating regulatory capital but also by disclosing

greater risk information and setting standards for riskmanagement processes.

Basel II also provides incentives for banks to invest in andincrease the sophistication in their internal risk management

capabilities in order to gain reductions in capital. This will helpthem to increase their lending and to maximise profits /returns to shareholders.

Generally, banks consider regulatory requirements as a burden

to be complied with. However Basel II requirements are viewedas an opportunity for the banks to demonstrate their credentialsand strength.

The reputation of a bank is very important. Banks are trying

hard to ensure compliance with Basel II to prove themselves asood ractioners of sound risk mana ement methodolo .


10/55

Scope Of Application Of Basel II The Basel II Accord aligns regulatory capital with the risk

profile of a bank. It rests on 3 Pillars, as under

First Pillar. MINIMUM CAPITAL REQUIREMENT.

Second PillarSUPERVISORY REVIEW PROCESS.

Third PillarMARKET DISCIPLINE.

The first pillar replaces the existing One Size Fits Allframework of Basel I accord for the assessment of capital with

several options for the banks. The second pillar provides guidelines for supervisors to ensure

that each bank has robust internal systems for riskmanagement and the adequacy of capital is assessed properly.


11/55

Scope Of Application Of Basel II (cont) The third pillar puts in place disclosure norms about risk

management practices and allocation of regulatory capital.This pillar helps to strengthen market discipline as acomplement to supervisory efforts.

Banks and supervisors are required to pay attention to the

second and third pillars . The revised framework will be mainly applicable to

internationally active banks. All banking and other relevantfinancial activities (other than insurance) conducted within

a group containing an internationally active bank will becaptured through a consolidation process.

The revised accord also provides incentives to banks toimprove their risk management practices .


12/55

Pillar I Minimum Capital Requirement1) Capital for Credit Risk

a) Standardized Approach.b) Internal Rating Based Approach (IRB).

i) Foundation Approach.

ii) Advanced Approach.

2) Capital for Market Risk a) Standardized Method.

i) Maturity Method.

ii) Duration Method.

b) Internal Models Method.3) Capital for Operational risk

a) Basic Indicator Approach.

b) Standardized Approach.

c) Advanced Measurement Approach.


13/55

Pillar II Supervisory Review Process

Evaluate Risk Management System.

Ensure the integrity and soundness of thebanks internal processes to assess adequacyof capital.

Ensure maintenance of minimum capitalwith prompt corrective action for shortfall.

Prescribe differential capital, wherenecessary, i.e., where internal processes areslack / weak.


14/55

Pillar III Market Discipline

Enhanced disclosures.

Core disclosures & Supplementary Disclosures.

Timely - at least semiannual disclosures.

Thus Basel II framework of 1995 is more risksensitive than Basel I framework of 1988.


15/55

Pillar I Capital Charge For Credit Risks Since Basel I was a one size fits all framework, it affected

proper capital allocation for credit risk. The capital allocationshould vary with the risk rating of an asset. Higher the risk,higher should be the capital allocation.

This aspect is addressed in Basel II. Under the new accord,rating methodology acquires importance. The accord suggeststwo options for rating - Rating by External Rating Agencies orRating based on Internal Assessment .

The integrity and consistency of rating would be a criticalaspect under the new regime. The risk weights would ,thereafter, be based on the credit rating. The class or categoryof the borrower is also taken into account while prescribingthe risk weights.


16/55

Credit Risk Credit Risk can be defined as the possibility of losses due to

failure of the borrower / counterparty to meet theircommitments in relation to lending, trading settlements, orany other financial transaction. Alternatively, losses occurfrom reduction in portfolio value due to deterioration in creditquality.

Under Basel I, assets were assigned uniform risk weights suchas 0% for all sovereigns, 20% for all banks and 100% for allcorporates etc.

The credit rating or health of the counterparty was not taken

into account. This aberration is proposed to be corrected inBasel II. Along with the class / category of the borrower, hiscredit rating is given due consideration under the revisedaccord.


17/55

Credit Risk (continued) Banks have a choice between two broad

methodologies for calculating their capitalrequirements for credit risk.

One method is to measure credit risk in a

standardized manner based on external creditrating assessment.

Other method is to use the internal rating systemfor credit risk. This would be subject to the explicit

approval of the supervising authority. This second method, known as IRB approach has

two further options Foundation Approach and

Advanced Approach.


18/55

Standardized Approach (Option I) This option allows banks to measure credit risk in a

standardized manner based on external credit rating from arecognized agency.

RBI have accredited certain rating agencies ( presently,CRISIL ,CARE, ICRA and FITCH). The risk weights are

inversely related to the credit rating of the counterparty, i.e.,higher the credit rating, lower will be the risk weight etc.

The rating agencies are given recognition based on certaincriteria like

i) Objectivity,ii) Independence,

iii) Transparency,

iv) Disclosure,

v) Credibility.


19/55

Standardized Approach (continued) For the purpose of credit rating of sovereigns, the country

scores of Export Credit Agency (ECA) may be recognized. In the case of commercial banks, two options are available.

Under the first option, all banks in a given country areassigned a risk weight one notch below the risk weightassigned to that country. In respect of exposures on banks,

the following methodology is used For rupee exposures on domestic scheduled banks, the risk

weight will be 20% and it will be 100% in respect of nonscheduled banks having minimum CRAR. For others, it willbe on a graded scale, depending on their CRAR and rangesfrom 50% to 125%.

In case of foreign currency exposures, the risk weights willdepend upon the ratings assigned to the counterparty byrecognized international rating agencies such as Moodys and

Standard & Poors.


20/55

Standardized Approach (continued) Claims on corporates have risk weights based on credit

ratings. The risk weights for unrated claims would be 100%.Unrated

corporates can not have a rating better than their sovereignsof incorporation. The supervisor may increase the standardrisk weight of unrated claims based on default experience.

The standardized approach gives a special treatment tocertain classes of exposures. Retail and SME exposures attracta uniform risk weight of 75%.To become eligible for inclusionin retail category, the criteria stipulated are as under

i) Exposure is to an individual person or persons or to a smallbusiness,

ii) Exposure is in the form of a revolving credit, personal termloans, small business facilities. Securities, bonds and equitiesare specifically excluded.

iii) Portfolio must be well diversified (granularity concept).


21/55

Standardized Approach (continued)iv) Low value of individual exposures. The single borrower

exposure limit to be Euro 1 million.( In our country RBI has

proposed to fix a ceiling of RS.50 Million for this purpose).Lending fully secured by mortgage on residential property to

have a risk weight of 50% for loans up to RS.2 million and 75%for others, provided LTV is not more than 75%.

Loans secured by commercial real estate will have a risk weight of150%.

Past due loans would attract 150% risk weight when specificprovisions are less than 20%. The risk weight would go down ifhigher provisioning is available.

In case of off balance sheet items, credit conversion factors areused like the ones in Basel I accord.

Cash or liquid securities available are allowed to be netted if thebank has a right to appropriate the same. Where certainguarantees are available, like ECGC or CGTMSE, the risk weight

would go down accordingly.


22/55

Internal Rating Based Approaches One of the most innovative aspects of Basel II is the Internal

Rating Based approach for measurement of capitalrequirement for credit risk. This approach involves assigningrisk weights based upon the internal ratings of the borrowers.

The rating exercise must fulfill certain criteria to the

satisfaction of the regulator. There are two options available Foundation Approach and Advanced Approach.

In the IRB approaches, the banks internal assessment of keyrisk parameters serves as a primary input to capital

computation. The main features of IRB approach are i) capital charge computation is dependent upon the followingparameters PD (probability of default), LGD (loss givendefault), ED (exposure at default) and M ( effective maturity)


23/55

Internal Rating Based Approach ( cont )

IRB approach computes the capital requirement of eachexposure directly.

Banks need to categorize banking book exposures into broadclasses of assets with different underlying risk characteristicssuch as (a) corporate (b) sovereign (c) banks (d) retail and

(e) equity or capital market. Within corporates and retail,there are subclasses which are separately identified.

Risk weighted assets are derived from the capital chargecomputation. Banks must use the risk weights provided byBasel II.

IRB approach does not allow banks to determine all theabove elements.


24/55

Advanced Approach Foundation and advanced approaches differ primarily in

terms of the inputs that are provided by the Bank on its ownestimates and those that are specified by the supervisor.

Under the Foundation Approach, Banks provide their ownestimates of PD and rely upon supervisory estimates for other

risk components. Under the advanced approach, banks provide their own

estimates of PD, LGD, ED and M.

Banks adopting to use IRB approach are expected to continue

the same. A voluntary return to the earlier or lower approachis permitted only in very exceptional circumstances with theRegulators approval.


25/55

Capital Charge For Market & Operational Risks Changes in market prices of assets affects financial

conditions. Assets may appreciate or depreciate in value. Thisrisk is called Market Risk.

Banks face risks other than credit risk and market risk andthese can be substantial. These are called Operationalrisks.

Basel I accord did not address the issue of allocation ofcapital for operational risks. There is a general perceptionthat operational risks are on the rise. Many bank failures likethe Daiva Bank have been attributed to the operational risks(failure of internal controls ).

Basel II accord has dealt with the issue of allocation of capitalfor operational risks and has suggested three methodologiesfor the same.


26/55

Capital Charge For Market RiskMarket risk is the risk of losses in on-balance sheet and off

balance-sheet positions arising from the movement in marketprices. The market risk positions requiring capital charge are

i) Interest rate related instruments in the trading book,

ii) Equities in the trading book, andiii) Open FX positions (including positions in precious metalsand commodities) throughout the bank, i.e., both thebanking book and the trading book.

A trading book consists of financial instruments andcommodities held with either trading intent or in order tohedge other elements in the trading book.


27/55

Capital Charge For Operational Risk Basel II accord stipulates that the positions should be

frequently and accurately valued. The regulator may provideguidance on prudent valuation for positions.

In the Indian context, the trading book comprises of

i) Securities under Held for Trading category (HFT),

ii) Securities under Available For Sale category (AFS),

iii) Open Foreign Exchange positions,

iv) Open Gold Positions,

v) Trading Positions in Derivatives, and

vi) Derivatives for hedging trading positions.

Banks will be required to calculate counterparty credit riskcharge for OTC derivatives.


28/55

Capital Charge For Interest Rate Related

Instruments And Equities

The capital charge for interest rate relatedinstruments and equities would apply to the currentmarket value of these items. The minimum capital

requirement comprises of two components as under

Specific risk charge for each security, which is similarto the conventional capital charge for credit risk both

for short and long positions, and General market risk charge towards interest rate risk

in the portfolio.


29/55

Capital Charge For Operational Risk

In the Basel I accord, risk capital for operational risk was notenvisaged.

Basel II accord deals with this important aspect of riskmanagement and prescribes minimum capital for

operational risk. Operational risk varies with the volume and nature of

business. It may be measured as a proportion of grossincome, which is a direct measure of operational volumes.

Operational risk is defined as a risk of loss resulting from

inadequate or failed internal processes, people, systems orfrom external processes / events. This definition includeslegal and compliance risk, but excludes strategic andreputational risk.


30/55

Capital Charge For Operational Risk

(continued)

Basel II accord provides three methods for calculatingcapital charge for operational risks

1) The Basic Indicator Approach (BIA),2) The Standardized Approach (SA), and

3) The Advanced Management Approach (AMA).

The banks are expected to move from the Basic IndicatorApproach to Advanced Management Approach over aperiod of time. A bank will not normally be allowed torevert to a simpler approach once it is approved for moreadvanced approach.


31/55

Basic Indicator Approach Under the BIA regime, a bank must hold capital for

operational risk equal to the average over theprevious three years of a fixed percentage (denotedby alpha) of positive annual gross income. If annualincome is negative or zero, it should be excluded.

The capital charge may be expressed as follows

K = ( GI 1..3 X alpha ) / 3, where ,

K = Capital charge required under BIA,

GI = Gross Annual Income over the previousthree years, wherever positive, and

alpha = 15% which is set by Basel II accord.

Basic Indicator Approach


32/55

Basic Indicator Approach

(continued) Annual Gross Income is defined as NII + NNII.

This amount should be -i) gross of any provisions,

ii) gross of operating expenses,

iii) exclude realized profits / losses from sale of investmentsin the banking book (AFS & HTM), and

iv) exclude extraordinary or irregular items and incomederived from insurance business. Thus,

GI = Operating profit + operating expenses extraordinaryitems realized profits from sale of investments in thebanking book.

Banks using this approach are expected to comply with BaselCommittees guidance on sound practices for the

management and supervision of operational risks.


33/55

The Standardized Approach Under this approach, the banks activities are divided into

eight business lines as under 1) Corporate Finance 2) Trading & Sales

3) Retail Banking 4) Commercial Banking

5) Payments & Settlements 6) Agency Services

7) Asset Management 8) Retail Brokerage.

Within each business line, gross income is a broad indicatorfor the operational risk exposure. The capital charge for eachbusiness line is calculated by multiplying the gross income by

a factor ( beta) assigned to that business line. The totalcharge is the three years average of the simple summation ofthe regulatory capital charges for each of the business lines.The total charge is expressed as -


34/55

The Standardized Approach

(continued)

K = Years 13 max ( GI 1.8 * Beta 1.8 ) / 3., where

K = Capital charge required,

GI 18 = Annual gross income for each of the eight

business lines in a year, andbeta 1.8 = a fixed percentage set by Basel II accord.

The values of beta for different lines of business are asunder

Corporate Finance 18% Trading & Sales 18% ,

Retail banking 12% Commercial Banking 15%,

Payments &Settlements 18%, Agency services - 15%,

Asset management 12% Retail Brokerage 12%.


35/55

Advanced Management Approach

Under the Advanced Management Approach,banks internal operational risk measurementsystem is used. Internal Measurement System isrequired to be vetted by the Supervisor.

The regulatory capital requirement for operationalrisks will be equal to the risk measure generated by

the banks internal operational risk measurementsystem, using certain qualitative and quantitativecriteria as listed below:


36/55

Qualitative Standards A bank must have an independent operational risk

management function.

Operational Risk Management System must be closelyintegrated into day to day risk management processes.

There must be a regular reporting system of operational riskexposures and loss experiences to the Board.

Operational risk Management System must be welldocumented.

Internal / external auditors must perform regular reviews ofoperational risk management processes and measurementsystems.

The validation of operational risk management systemshould be done by external auditors or the Supervisor.


37/55

Quantitative Standards In view of the continuing evolution of analytical approaches

to operational risk, the Basel Committee has chosen not toprescribe a specific approach. However, a bank mustdemonstrate that their operational risk measures fulfilsoundness standards comparable to that of internal rating

based approach. The quantitative standards prescribed bythe Committee are as under

1) The internal operational risk measurement system must beconsistent.

2) The bank should calculate the regulatory capital and theexpected as well as unexpected losses - EL and UL.

3) The measurement system must be sufficiently granular tocapture major events of operational risks.

Q lit ti St d d


38/55

Qualitative Standards

(continued)

4) The systems for determining correlations must be soundand the bank must validate the correlation assumptions.

5) The system must have key elements that meet supervisorystandards.

6) A bank needs to have a credible, transparent , welldocumented and verifiable approach for weighing thefundamental elements in the risk measurement system.

7) Internally generated measures must be based on aminimum 5years observation period in internal loss data.

8) A banks risk measurement system must use relevantexternal data.

9) A bank must use scenario analysis of expert opinion inconjunction with external data to evaluate its exposure to

high severity events.


39/55

Prevention Of Operational Risks The measures to prevent and control operational risks involve

various tasks such as Personnel Selection Effective selection, training,

induction , placement and promotions are critical factors.Integrity , domain knowledge and efficiency are importantrequisites.

Work Culture Working environment, values and ethics playan important role.

Organizational Structure A formal chain of command,compliances, grievance redressal mechanism are key factors.

Audit & Internal Control - Effective audits, mix ofcontinuity and surprise checks are essential to controloperational risks.

System of Reviews & Revision Periodical reviews ofexisting business processes in the light of changing

environment, legal framework is essential.


40/55

Pillars II & III

Supervisory Review & Market Discipline

Pillar I deals with calculation of capital charge for credit,market and operational risks.

The process of ascertaining capital adequacy needs to bereviewed and monitored by the Supervisor. Principles forsuch a review are laid down by the Basel committee.

Transparency and objectivity are considered by thecommittee as important parameters of review process.

The third pillar of Market Discipline is critical. BaselCommittee prescribes the disclosure norms so as to enable

the market to assess a banks position. The market needs aconsistent and large scale information for making ameaningful assessment. Pillar III prescribes severalqualitative and quantitative disclosures for this purpose.

The three pillars thus play a mutually complementary role.


41/55

Pillar II

Supervisory Review Process

The Supervisory Review Process addresses two issues-

1) To ensure that the banks have adequate capital to supportall the risks in their business , and

2) To encourage banks to develop and use better riskmanagement techniques in identifying, measuring,monitoring and mitigating their risks.

Supervisors are expected to intervene, where necessary.

They have to identify the deficiencies, if any, and prompt and

decisive action should be taken to reduce risk or increasecapital. The supervisors need to focus more on weakerbanks.

The supervisors need to concentrate on three major areas-


42/55

Supervisory Review Process (continued)

1) Risks considered under Pillar I, but not fullycaptured, such as credit concentration risk,

2) Factors that are not addressed in Pillar I processsuch as strategic risk, or interest rate risk in the

banking book,3)Factors external to the bank such as businesscycle effects.

The Supervisor must ensure compliance ofminimum standards and disclosure requirementsof more advanced methods on a continuing basis.

Basel II Committee has identified 4 key principles of

Supervisory Review Process, as under -


43/55

Principle I Banks should have a process of assessing their

capital adequacy in relation to their risk profile anda strategy for maintaining their capital levels.

Bank managements must have a rigorous processfor ensuring that the bank has adequate capital to

support its risks. The five main features of such aprocess are

1) Board & Senior Management Overview,

2) Comprehensive assessment of risks,

3) Sound Capital Assessment,

4) Monitoring & Reporting, and

5) Internal Control Review.


44/55

Principle II Supervisors should review and evaluate banks internal

capital adequacy assessments and strategies, as well as theirability to monitor and ensure their compliance withregulatory capital ratios. The Supervisors should takeappropriate supervisory action if they are not satisfied with

the results of this process. The emphasis of the supervisoryreview should be on the quality of the Banks RiskManagement Systems and controls.

The periodic review should cover the following aspects

1) On site examinations or inspections,2) Off - site review,

3) Discussions with Bank managements,

4) Review of work done by Auditors, and

5) Periodic Reporting.


45/55

Principle III

Supervisors should expect banks to operate abovethe minimum regulatory capital ratios and shouldhave the ability to require the banks to hold capitalin excess of the minimum needed.

Supervisors should require banks to operate with abuffer over and above the Pillar I standard. Buffer

is meant to cover uncertainties related to thesystem. Similarly, bank specific uncertainties areaddressed by bank specific buffer prescriptions.


46/55

Principle IV

Supervisors should seek to intervene at an early stage toprevent capital from falling below the minimum levelsrequired to support the risk characteristics of a particularbank and should require rapid remedial action if capital isnot maintained or restored.

If bank is not meeting the requirements in the above fourprinciples, the supervisor should consider a range of options.These may include extensive monitoring, restrictingdividend pay outs, requiring the bank to raise additionalcapital etc.

The Basel II Committee has identified a number ofimportant issues that require focused attention ofSupervisory Review Process. Some of these issues, whichare not directly addressed under Pillar I are as follows -

S i R i P


47/55

Supervisory Review Process

(continued)

1) Interest Rate Risk in the Banking Book,

2) Credit Risk (a) Stress Test Under IRB Approach

(b) Definition of Default

(c) Residual Risk(d) Credit Concentration Risk

3) Operational Risk.

The Supervisory Review Process would always involve some

amount of discretionary elements. Hence, supervisors musttake care to carry out their obligations in a transparent andaccountable way. The framework requires enhanced co-operation among supervisors for cross border supervision.


48/55

Pillar III Market Discipline The purpose of Pillar III Market Discipline is to

complement the minimum capital requirements ( Pillar I)and Supervisory Review Process (Pillar II).

Pillar III provides disclosure requirements for banks usingBasel II framework. These disclosures will allow market

participants to assess key information and thereby makeinformed decisions about a bank.

Basel Committee has made considerable efforts to see thatPillar III disclosures framework does not conflict with the

requirements under the accounting standards. Accountingand other mandatory disclosures are generally audited.

Additional disclosures provided under Pillar III frameworkmust be consistent with the audited statements. Banks are

encouraged to provide all the information at one place.


49/55

YOU


50/55


51/55


52/55


53/55


54/55


55/55

What are Tier III Capital Items?A Tier III Capital is raised to meet part of the Market

Risk, viz., changes in interest rates, exchange rates,equity prices, commodity prices etc. Issuance ofshort term subordinated debt subject to lock inperiod clause of two years and further limited to theextent of 250% of Tier I Capital would form part ofTier III Capital.

Thus, the capital of a Bank consists of Tier I, Tier II

and Tier III Capital, which are owned and borrowedfunds which are available to the business on longterm basis.

Documents

Capital Adequacy - Basel II Accord