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Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as credit risk, operational risk etc. In the most simple formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's depositors and other lenders.
Basel III requires banks to have a minimum CET1 ratio (Common Tier 1 capital divided by risk-weighted assets (RWAs)) at all times of: . 4.5%; Plus: A mandatory "capital conservation buffer" or "stress capital buffer requirement", equivalent to at least 2.5% of risk-weighted assets, but could be higher based on results from stress tests, as determined by national regulators.
Another term commonly used in the context of the frameworks is economic capital, which can be thought of as the capital level bank shareholders would choose in the absence of capital regulation. [3] The capital ratio is the percentage of a bank's capital to its risk-weighted assets. Weights are defined by risk-sensitivity ratios whose ...
The Bank maintained a capital adequacy ratio at 11.46 percent as on December 31, 2011, against requirement of 10 percent set by Bangladesh Bank. Credit Rating Information and Services Limited (CRISL) rated the Bank AA− (Double A Minus) for the long term and ST-2 for the short term based on the financial statements of the Bank for the year 2010.
The Tier 1 capital ratio is the ratio of a bank's core equity capital to its total risk-weighted assets (RWA). Risk-weighted assets are the total of all assets held by the bank weighted by credit risk according to a formula determined by the Regulator (usually the country's central bank).
The term standardized approach (or standardised approach) refers to a set of credit risk measurement techniques proposed under Basel II, which sets capital adequacy rules for banking institutions. Under this approach the banks are required to use ratings from external credit rating agencies to quantify required capital for credit risk.
The tier 1 capital ratio = tier 1 capital / all RWA The total capital ratio = (tier 1 + tier 2 capital) / all RWA Leverage ratio = total capital/average total assets Banks are also required to report off-balance-sheet items such as letters of credit, unused commitments, and derivatives. These all factor into the risk weighted assets, which are ...
On March 4, 2016, the Basel Committee on Banking Supervision finally updated its proposal for calculating operational risk capital, introducing the Standardized Measurement Approach (“SMA”). Building upon its 2014 version, the SMA would not only replace the existing standardized approaches, but also the Advanced Measurement Approach.