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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.
To qualify for deposit insurance, member banks must follow certain liquidity and reserve requirements. Banks are classified in five groups according to their risk-based capital ratio: Well capitalized: 10% or higher; Adequately capitalized: 8% or higher; Undercapitalized: less than 8%; Significantly undercapitalized: less than 6%
A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted
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.
The Federal Deposit Insurance Corporation (FDIC) classifies banks according to their risk-based capital ratio [3] [failed verification]: Well capitalized: 10% or higher; Adequately capitalized: 8% or higher; Undercapitalized: less than 8%; Significantly undercapitalized: less than 6%; Critically undercapitalized: less than 2%
Risk sensitivity - Capital requirements based on internal estimates are more sensitive to the credit risk in the bank's portfolio of assets; Incentive compatibility - Banks must adopt better risk management techniques to control the credit risk in their portfolio to minimize regulatory capital; To use this approach, a bank must take two major ...
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