(7) Capital Adequacy by Anujit Mitra.ppt

8/10/2019 (7) Capital Adequacy by Anujit Mitra.ppt

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Report on Capital Adequacy

Under Basel IIRCA 2

First return developed on XBRL

Anujit Mitra ([email protected])

Department of Banking Supervision, RBI
mailto:[email protected]:[email protected]


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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



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



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



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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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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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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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 !!!

Documents

(7) Capital Adequacy by Anujit Mitra.ppt