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Minimum Capital Requirement:: Credit, Market and Operational Risk

The document discusses the minimum capital requirements for banks with respect to credit, market, and operational risk. It defines how to calculate the Tier 1 and Total Capital Adequacy Ratios (CRAR) using different tiers of capital funds and risk-weighted assets (RWA) for each type of risk. It also provides details on how RWAs are calculated for credit risk based on various exposure types and their external ratings.

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Mohammad Faizu
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166 views

Minimum Capital Requirement:: Credit, Market and Operational Risk

The document discusses the minimum capital requirements for banks with respect to credit, market, and operational risk. It defines how to calculate the Tier 1 and Total Capital Adequacy Ratios (CRAR) using different tiers of capital funds and risk-weighted assets (RWA) for each type of risk. It also provides details on how RWAs are calculated for credit risk based on various exposure types and their external ratings.

Uploaded by

Mohammad Faizu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Minimum Capital Requirement:

Credit, Market and Operational Risk.


Calculation of CRAR:
Tier 1 CRAR = Eligible Tier 1 Capital Funds

Credit Risk RWA + Market Risk RWA + Operational Risk RWA

Total CRAR = Total Capital Funds

Credit Risk RWA + Market Risk RWA + Operational Risk RWA


Tier 1 capital funds:
• Upper Tier 1 (4% of RWA)
• Paid up equity capital, statutory reserves, and other disclosed free
reserves, if any;

• Capital reserves representing surplus arising out of sale proceeds of


assets;
• Lower Tier 1 ((Not more than 15% of Tier 1)
• Innovative Perpetual debt instruments;

• Perpetual Non-Cumulative Preference Shares (PNCPS);

• Any other type of instrument generally notified by the Reserve Bank


from time to time.
Tier 2 Capital Funds:
Upper Tier 2 (Not more than 100% of Tier 1)
• Revaluation Reserves;

• General Provisions and loss reserves;

• Hybrid Debt capital instruments;

Lower Tier 2 ( Not more than 50% 0f Tier 1)


• Subordinated Debt.
Tier 3 Capital Funds:
• Short term subordinated loans.
(not more than 250% of Tier 1)
Calculation of RWA’s

• Regulatory treatment of various Risks.

• Own assessment of Risk.


RWA for Credit Risk:

• Standardised Approach.

• Internal Rating Based Approach


Capital Charge for market risk:

• Specific Market Risk;

• General Market Risk;


Capital Charge of Operational Risk:

• Basic Indicator Approach.

• The Standaradised Approach.

• Advanced Measurement Approach.


How to convert capital Charge into RWA?

• Capital Charge = CRAR * RWA

• Alternatively, RWA = Capital Charge


CRAR
RWA for credit Risk:

• On Balance Sheet exposures.

• Off-Balance Sheet exposures.


RWA for Credit Risk:

• Methodology;

Exposure buckets external Rating Assignment of Regulatory Risk Weights


Exposure Buckets: On balance sheet
• Claims on Sovereigns.

• Claims of PSE’s.

• Claims on MDB’s BIS and IMF.

• Claims on banks.

• Claims on Primary Dealers.

• Claims on corporates.

• Claims included in the regulatory retail portfolio.

• Claims secured by residential property.

• Claims secured by commercial real estate.


Exposure buckets:

• Non-performing Assets;
Exposure Buckets: Off balance Sheet

• Undrawn facility * CCF determined by regulator


External Ratings – Regulatory Risk Weights

• Claims on sovereigns – zero risk weight


External Ratings – Regulatory Risk Weights

• Claims on foreign sovereigns:

S&P/Fitch ratings AAA to A BBB BB to B Below B Unrated


AA

Moody’s Ratings Aaa to A Baa Ba to B Below B Unrated


Aa

Risk weights 0% 20% 50% 100% 150% 100%


Risk Weights:
• Claims on MBD’s BIS and IMF: 20% risk Weight
• World Bank Group, IBRD and IFC.
• Asian Development Bank.
• African Development Bank.
• European Bank for Reconstruction and Development.
• Inter-American Development Bank.
• European Investment Bank.
• European Investment Fund.
• Nordic Investment Bank.
• Caribbean Development Bank.
• Islamic Development Bank.
• Council of Europe Development Bank.
External Ratings – Regulatory Risk Weights

• Claims on foreign PSE’s:

S&P/Fitch ratings AAA to A BB to B Below B Unrated


AA

Moody’s Ratings Aaa to A Ba to B Below B Unrated


Aa

Risk weights 20% 50% 100% 150% 100%


External Ratings – Regulatory Risk Weights
Level of
CRAR (%) in
Risk Weights
the investee All scheduled banks (Commercial, All non-scheduled banks (Commercial,
RRB’s Local Area Banks, and Co-op RRB’s Local Area Banks, and Co-op
bank Banks Banks

Investments All other Investments All other


within 10% limit investments within 10% limit investments

1 2 3 4 5
Highier of 100% risk weight as Highier of 100% risk weight as
9 and above per the rating of the instrument
or counterparty, whichever is
20 per the rating of the instrument
or counterparty, whichever is
100
higher higher

6 to < 9 150 50 250 150


3 to < 6 250 100 350 250
0 to < 3 350 150 625 350
Negative 625 625 Full 625
deduction
External Ratings – Regulatory Risk Weights

• Claims on Corporates: Long term

Domestic Rating AAA AA A BBB BB and Unrated


Agency below

Risk weights 20% 30% 50% 100% 150% 100%


External Ratings – Regulatory Risk Weights
• Claims on Corporates: short term

Short – term ratings Risk


Weight
CAR CRISI Fitch ICRA
E L
PR1+ P1+ F1+ A1+ 20%
(Ind)
PR1 P1 F1 (Ind) A1 30%

PR2 P2 F2 (Ind) A2 50%

PR3 P3 F3 (Ind) A3 100%

PR4 & P4 & P5 F4/F5 A4/A5 150%


PR5 (Ind)
Unrated Unrated Unrated Unrated 100%
External Ratings – Regulatory Risk Weights

• Claims on Non-resident corporates:

S&P/Fitch ratings AAA to A BBB to Below Unrated


AA BB BB

Moody’s Ratings Aaa to A Baa to Below Unrated


Aa Ba Ba

Risk weights 20% 50% 100% 150% 100%


Claims under RRP’s

• Risk Weight 75%


Claims secured by residential property:

• Amount of loan Risk weight

• Upto 30 lakhs 50%


• Rs 30 lakhs and above 75%
Claims secured by commercial real estate:

• Risk weight = 150%


Off-balance sheet exposures:

CCF
• Commitment upto (1 year) 20%
• Commitments over (1 year) 50%
Illustration:
Consider the following credit exposures of a
private bank: (in crores)

S.No Nature of credit exposure External Rating BOS


1. Local Sovereign loans: AAA 300
2. Loans to Government of Bangladesh A 250
3. Loans to Islamic Development Bank AAA 100
4. Short term corporate loans Below P3 300
5. Retail Loans Unrated 500
6. Residential Mortgage having a limit of 30 lakhs Unrated 700
7. Short – term letters of credit to local corporates Unrated 1000
Total loan assets: 3150
RWA for credit Risk:
S.No Nature of credit exposure Outstandi Regulatory Risk
ng Risk Weighted
Balance Weight Assets
1 Local Sovereign loans 300 0 0

2 Loans to Government of Bangladesh 250 20% 50

3 Loans to Islamic Development Bank 100 20% 20

4 Short term corporate loans 300 150% 450

5 Retail Loans 500 75% 375

6 Residential Mortgage upto 15 lakhs 700 50% 350

7 Short – term letters of credit 200* 100% 200

Total RWA: 1445


Calculation of Capital Charge for Credit Risk:

Capital charge for credit risk = CRAR * RWA


= 0.09 * 1445
= 130 crores
Illustration:
• Now assume that the capital charge is
given for the market and operational risk
as:

1. Capital charge for market risk = 110 crores


2. Capital charge for operational risk = 75 crores
RWA for market and operational risk:

• RWA for market risk = capital charge


CRAR
Calculation of overall regulatory CRAR

Total Capital funds


RWA for Credit Risk + RWA for Market Risk + RWA for Operational Risk
Illustration:
• Assume that the bank under consideration
has 180 crore of capital funds, therefore,
CRAR =

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