A committee of central banks and bank supervisor and regulators from he major industrialized countries (Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Sweden, Switzerland, U.K and USA) that meets every three months at BIS in Basel.
The objectives of Basel
II are given below:
1. Should constitute a
more comprehensive approach to address banking risks.
2. Appropriately
sensitive to degree of risk.
3. Should continue to
enhance competitive equality and promote safety and soundness of the financial
system.
Three
Pillars of Basel II:
1. Minimum Capital
Requirement
2. Supervisory Review
3. Market Discipline
Guidelines
for Minimum Capital Requirement:
1. Minimum Capital
Requirement
2. Assessing Overall
Capital Adequacy
3. Disclosure of Information
on Bank’s Risk Profile, Capital Adequacy and Risk Management.
Capital
Base: Regulatory capital is composed of:
• Tier -1 or Core
Capital
• Tier-2 or
Supplementary Capital
• Tier-3 or Additional
Supplementary Capital
What
is Tier – 1 Capital:
Tier-1 capital or Core
Capital comprises of highest quality capital elements:
• Paid up
capital/capital deposited with Bangladesh Bank
• Non-repayable share
premium account
• Statutory Reserve
• General Reserve
• Retained Earnings
• Minority interest in
subsidiaries
• Non-cumulative
irredeemable Preference Share
• Dividend Equalization
Account
What
is Tier-2 Capital?
Tier-2 capital or
Supplementary Capital represents other elements which fall short of some of the
characteristics of the Core Capital but contribute to the overall strength of a
bank. Tier-2
capital is for long
term.
• General Provision
• Asset Revaluation
Reserves
• All other Preference
Share
• Perpetual
Subordinated Debt
• Exchange Equalization
Account
• Revaluation Reserves
for Securities
What
is Tier-3 Capital?
Tier-3 capital of
Additional Supplementary Capital consists of short-term subordinated debt
(original/residual
maturity less than or equal to five years but greater than or equal to two
years) would be solely for the purpose of meeting capital requirement for
market risk.
Conditions
for Maintaining Regulatory Capital:
1. T-2 + T-3 cannot
exceed T-1.
2. At least 20% market
risk to be supported by T-1.
3. General provisions
is limited to maximum 1.25% of Total Risk Weighted Asset (TRWA)
4. Subordinated debt
(T-2) shall be limited to maximum 30% of T-1.
5. 50% of asset and
security revaluation reserve shall be eligible for T-2.
6. For downside
revaluation full amount will be deducted but for upside revaluation only 50%
will be added.
7. T-3 is limited to
250% of T-1 after meeting credit risk.
Eligible
Regulatory Capital:
1. Following Deductions
are to be made from T-1:
a) Book value of
Goodwill
b) Provisioning
shortfall
c) Deficit on account
of revaluation in investment.
2. Eligible T-2 and T-3
will be derived after deducting components, if any, qualified for deduction.
3. Total Eligible
Regulatory Capital = (Eligible Tier-1 Capital + Eligible Tier-2 Capital +
Eligible
Tier-3 Capital).
Minimum
Capital Requirement:
• No schedule bank in
Bangladesh shall commence and carry on business unless it has minimum
paid up capital/capital
deposited with Bangladesh Bank as fixed by Bangladesh Bank.
• Capital Requirement =
≥ 10% with Tier-1 at least 5%.
• TRWA = RWA for Credit
Risk + 10 (capital charge for market risk and operational risk).
Methodology
for Calculating RWA
1. Convert OBSA to BSA
by multiplying with the credit conversion factors.
2. Apply Risk
Mitigation Technique
3. Multiply each asset
and converted OBSA by appropriate R. W. in order to get RWA.
4. Then, sum these RWA
and get TRWA.