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Report on Capital Adequacy
Under Basel IIRCA 2
First return developed on XBRL
Anujit Mitra (amitra@rbi.org.in)
Department of Banking Supervision, RBI
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Approach for Basel II
All commercial banks in India (excluding Local AreaBanks and Regional Rural Banks) to adopt
Standardised Approach (SA) for credit risk
Basic Indicator Approach (BIA) for operational risk Standardised Duration Approach (SDA) for computing
capital requirement for market risks
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Timeline - achieved
Mar 31, 2008for all Foreign Banks operating in India and otherIndian Banks having operational presence outside India
All other commercial banks (except Local Area Banks and Regional
Rural Banks) were encouraged to migrate to these approaches underthe Revised Framework in alignment with them but in any case notlater thanMarch 31, 2009
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Parallel Run Banks migrating to the revised framework were
advised to have parallel run and they have been
submitting the quarterly reports to their board and toRBI
Detailed return for the same has been introduced inDecember 2009, this was the first return implemented
on XBRL platform by RBI
The same was re-launched over Internet in March2009
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Migration to the Advancedapproaches - FlexibilityBanks, at their discretion, would have the option of
adopting the advanced approaches for one or moreof the risk categories, as per their preparedness,
while continuing with the simpler approaches forother risk categories
It would not be necessary to adopt the advancedapproaches for all the risk categoriessimultaneously.
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Presenting the systemUsers From RBI
Administrator
Manages Bank Master and creates Administrators forthose banks
View system MIS reports and log
Has full access right over all banks to view their returns
May Reject returns submitted by the bank (s)
Users
Has predefined access right to view returns and generate
reports
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Users from BanksAdministrator
Creates / deletes users from the banks anddefines the role of each user (maker-checker)
Users
Maker - Enabled to enter, modify and view databut would not be able to submit data to RBI
Checker - Enabled to view and submit data
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Banks view of the system
Accessible through the ORFS page secure
accessData Preparation
Login
Download Excel Template Fill in data
Validate - debug
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Submission of Data Create Instance Document
XBRL instance created transparent to the user Save document
Submit to RBI
Encrypt with digital signature or symmetricencryption
Print for records, if required
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Retrieve submitted returns
After logging in user may be able to view /download returns already submitted
He may download the same and modifyHe may resubmit
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Advanced approachUse the MIS to create the XML output or
even better make use of the XBRLUpload document
Submit to RBI
Encrypt with digital signature orsymmetric encryption
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Expected developments in RBIFurther versions of RCA II next one
possibly by December 2009Working group on OSMOS re-devolopment
Reviewing the return structures
May suggest quick XBRL adoption for allOSMOS returns
May suggest few new returns for Basel II
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At RBI - Analysis of returns
Through Standard reports
Fixed format
Frequently used
Easy to generate and use Through Adhoc reports
User to choose elements
Downloadable to Excel for further Analysis
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Analysis - A look at CapitalAdequacy
Need for capitalAcceptable capital standards
Initiatives of Basel (BCBS)
Basel I AccordBasel II Accord
Risk assessment under Basel II
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Need for capitalSupports banks operations (source of funds)
Provides cushion against unexpected losses stemming
from credit, market and operational risks thusmaintains solvency of a bank
Encourages depositors confidence
Encourages shareholders interest in governance of the
bank Regulatory comfort as bank insolvency is costly to the
economy
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How much capital?? Before Basel standards, regulators set minimum capital
requirements in absolute terms or as gearing ratio.
After Basel, capital is aligned to the quantum of riskscarried by a bank.
Elimination of probability of bank insolvency is notpossible hence the present capital standards aim to ensurethat a bank would not be insolvent under an acceptableprobability.
Measuring losses to quantify the level of capital
requirement is the core issue.
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Basel I to Basel II Weaknesses of Basel I
One size fits all approach
Crude method of credit risk measurement However, measurementof market risks is more scientific and aligned to reality
Inadequate differentiation of credit risk
Risk mitigation techniques not recognised
No incentives for better risk management
Not addressed all risks
Encouraged regulatory arbitrage (securitisation and creditderivatives)
Hence the need for Basel II
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Basel II Accord Extensive consultative process beginning June 1999
Rests on three mutually reinforcing Pillars
Quantum of capital linked to riskiness of exposure
Covers capital charge for operational risk besides credit and marketrisks
Provides a menu of options to calculate credit risk and operational risk
Incorporates supervisory review process to address risks not coveredunder Pillar I and allows risk based supervision
Incentives for better risk management and control environmentthrough lesser capital requirement
Ensures market discipline through comprehensive disclosurerequirements
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Basel I Vs. Basel IIAll Banks CRAR(as of Mar 2009)(Amounts in Rs.Cr.) Basel I Basel II
Tier I Capital 331,494 333,810Tier II Capital 157,143 154,016
Total Capital 488,637 487,826
Total RWA 3704,827 3488,303
CRAR 13.19 13.98
Core CRAR 8.95 9.57
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Basel I Vs. Basel II - Foreign Banks(as of Mar 2009)(Amounts in Rs.Cr.) Basel I Basel II
Tier I Capital 51407 51811Tier II Capital 9203 9105
Total Capital 60609 60916
Total RWA 403033 425327
CRAR 15.04 14.32
Core CRAR 12.75 12.18
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Basel I Vs. Basel IINationalised
Banks(as of Mar 2009)
(Amounts in Rs.Cr.) Basel I Basel II
Tier I Capital 191053 192268Tier II Capital 116692 114063
Total Capital 307745 306331
Total RWA 2498398 2271344
CRAR 12.32 13.49
Core CRAR 7.65 8.46
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Basel I Vs. Basel IINPBs(as of Mar 2009)(Amounts in Rs.Cr.) Basel I Basel II
Tier I Capital 72602 73152Tier II Capital 27944 27756
Total Capital 100546 100908
Total RWA 665762 658331
CRAR 15.10 15.33
Core CRAR 10.91 11.11
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Basel I Vs. Basel IIOPBs(as of Mar 2009)(Amounts in Rs.Cr.) Basel I Basel II
Tier I Capital 16360 16579Tier II Capital 3301 3092
Total Capital 19662 19671
Total RWA 137180 133301
CRAR 14.33 14.76
Core CRAR 11.93 12.44
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Basel I Vs. Basel IIwho benefitted(as of Mar 2009) Out of the 80 banks 49 banks shown higher CRAR
17 out of 30 foreign banks got CRAR lower under Basel II9 out of 15 Old Private Sector Banks and 2 out of 7 New
Private Sector Banks shown higher CRAR under Basel II
Only 6 out of 27 Nationalised Banks including SBI Group
have shown lower CRAR
35 banks have shown higher RWA under Basel II
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Assessment of Capital AdequacyStandardised
Approach
A banks capital base is dynamic reflecting the success or otherwise ofthe banks ongoing business of managing risks through its controlenvironment
Analysis should broadly include
Regulatory capital and
Risk assets on and off balance sheet
Regulatory capital
Level of capital adequacy ratio and trend over periods
Quality proportion of Tier I capital to total capital and trend over periods
Components of Tier I capital
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Assessment of Capital Adequacy
Standardised Approach Credit Risk Off Balance Sheet (OBS) Exposures
Non Market related
Trends in quantum and composition of contingent credits &
commitments Volume of financial guarantees, undrawn committed lines of credit,
Letter of credits
Share in total off balance sheet exposures
Market related (Derivatives)
Quantum and composition
Maturity & potential future CCF wise distribution
Trend in potential and current exposure
Total OBS exposures as % of total on balance sheet assets
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Assessment of Capital Adequacy
Capital charge for failed transactions
Securities transactions Foreign exchange transactions
Market Risk Exposures
Trends in capital charge
Specific risk for securities held in HFT and AFS General market risk for securities held in HFT & AFS
Equity position
Foreign exchange and gold position
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Assessment of Capital Adequacy
Residual maturity wise securities held in (reflect
potential market risk exposure) HFT category
AFS category
Bonds of banks attracting higher capital charge due to
adverse CRAR Operational Risk
Trends in capital charge
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Assessment of Capital Adequacy
Issues
To provide input for Supervisory Review &Evaluation Process (SREP) under Pillar II
So deciding the trade off betweengranularity to be captured and ease ofcompilation / data management is crucial
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Thank you !!!
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