1. CAPITAL ADEQUACY
Presented by:
Sairam T A
Ramakrishnan
Raja Vignesh D
Prasanna Kumar
Priyadarshini

2. What is Capital
Adequacy?
Capital Adequacy is a measure of a bank's
capital to cushion against or absorb a reasonable
amount of losses before they become insolvent
and consequently lose depositors' funds. It
ensures efficiency and stability of a financial
system by lowering the risk of banks becoming
insolvent.

3. Bank for International
Settlement (BIS)
 The G-10 countries, Spain and Luxembourg
formed a standing committee in 1974 under the
support of the Bank for International Settlements
(BIS), called the Basel Committee on Banking
Supervision.
 Basel norms make it compulsory for banks to keep
aside certain part of their deposits to meet any
contingency.

4. Basel I
 Recommended for implementation in 1974, for
addressing the issue of risk involved in recovery of
loans lent
 Covered only Credit Risk, and ignored Market
Risk, Operational Risk, and Liquidity Risk
 Assets of banks were classified and grouped in
five categories to credit risk weights of 0,10,20,50
and up to 100%
 Assets like cash and coins usually have zero risk
weight, while unsecured loans might have a risk
weight of 100%

5. Basel II
 Introduced in 2004
 Laid down guidelines for capital adequacy, risk
management, and disclosure requirements.
 Use of external rating agencies to set the risk
weights for corporate, bank and sovereign
claims.

6. Basel III
 Widely felt that the shortcoming in Basel II norms
led to the global financial crisis of 2008
 Basel II did not have any regulation on the debt
that banks could take on their books
 Focused more on individual financial institutions,
while ignoring systemic risk
 Formed in 2010, to ensure that banks don’t take
on excessive debt, and don’t rely too much on
short term funds.
 Being implemented since April 1, 2013 in India, in
a phased manner. Transitional period for full
implementation is extended up to March 31, 2019

7. Liquidity Coverage Ratio
 Highly liquid assets held by financial institutions to
meet short-term obligations
 Designed to ensure financial institutions have the
necessary assets on hand to ride out short-term
liquidity disruptions

8. High Quality Liquid Assets
 Aims to ensure that a bank has an adequate
stock of unencumbered HQLA that consists of
cash or assets that can be converted into cash to
meet its liquidity needs for a 30 calendar day
liquidity stress scenario
 Appropriate corrective actions can be taken by
management and supervisors, or that the bank
can be resolved in an orderly way
 Will improve the banking sector’s ability to absorb
shocks arising from financial and economic stress,
thus reducing the risk of spill over from the
financial sector to the real economy

9. Capital Adequacy = 9% of Risk Weighted Assets
Risk Rates:
CRR - 0%
SLR - 0.25%
Private Sector Company Bond – 100%
Public Sector Company Bond – 20%

10. Tier1 + Tier2 Capital
Capital Adequacy Ratio = -----------------------------
Risk Weighted Assets
Tier 1 Capital = Equity Share Capital + Share
Premium + General Reserve (unencumbered)
Tier 2 Capital = Preference Share + Subordinated
Debt Bonds + Revaluation Reserves (45%)

11. Example
Using the following information. Calculate Capital Adequacy
Ratio.
The bank's Tier 1 Capital and Tier 2 Capital are $200,000 and
$300,000 respectively.
Exposure Risk Weight
Government Treasury held
as asset
1,500,000 0%
Loans to Corporates 15,000,000 10%
Loans to Small Businesses 8,000,000 20%
Guarantees and other
non-balance sheet
exposures
6,000,000 10%

12. Solution
Banks's total capital = Tier one capital + Tier two capital
= 200,000 + 300,000
= $500,000
Risk-weighted exposures
= $1.5×0% + $15×10% + $8×20% + $6×10%
= $3.7 million
Capital Adequacy Ratio
= Banks's total capital/ Risk-weighted exposures
= $0.5 million/ $3.7 million
= 14%

13. In the News
 June 23, 2016: Bank of India has raised Rs 1,000
crore through bonds that comply with Basel-III
norms for capital adequacy
 They have been rated AA (-) by Brickwork and
A+ by Crisil and bear a coupon rate of 11.50 per
cent
 June 28, 2016: Canara Bank to raise Rs 2,000
crore to create capital buffer
 By allotting equity shares/preference
shares/securities by way of follow on public issue,
rights issue and/or on a private placement basis
 Bank’s CAR as on March 31, 2016, stood at
11.08%, well above the 9 per cent stipulated by
RBI

14. In the News
 June 29, 2016: The Reserve Bank of India (RBI) has
raised concerns over the capital adequacy ratio
of many lenders (30 of 50)
 Could slip below the required level if there’s a
surge in bad loans
 Gross NPAs could rise to 8.5 per cent of the total
by March 2017, from 7.6 per cent in 2016.
However, if banks’ asset quality faces any severe
stress, it could rise to 9.3 per cent
 Public sector banks are a particular concern