CRAR: Capital to Risk Weighted Asset Ratio BAsel I - 1988 - 8% of RWA assets (based on only credit risk) resulted in formation of BASEL II reuired banks to make uf of Internal Ratings-Based approach to calculate their capital requiremnt for credit risk. Calculation based on ratings internally developed by banks. Unsystematic risk by earning/provision systematic risk by capital IRB approach: Piller I - COM riks other Approaches: Standareds approache - SA - Credit Basic Indicator approache - BIA - operational depends upon: Cost of Implementation: COI Cost of Compliance : COC Commerial bank starte basel II from march 31 2007 3 pillers of Basel II: -Min cap -Sup - Discipline Piller I - min cap requirem for credit rsisk can be cal in 3 ways - Standareds approach: BCBS (basel committee on banking supervision) ECA - export credit agnecy CRAR = Total Eligibli cap / RWA for (C + O + M) - Foundation internal rating based approache method - PD based on historial data of 5 yrs - LGD ( loss given the default) - EAD ( exposure of default) - Matureity of exposure/ remainng economic maturit of exp - risk weight provided by basel II formulat The risk weighte assedt = total cap reqiurem/ 0.09 - Advanced internal rating based approach data of 7 years to calculate PD, LGD, EAD, M * 5 stages for determing credit risk - determin cat of expoure out of 5 by rbi - determin/backing of depostio underline -refining the applicable risk weights - RWA of exposure = Adjusted exposure of Party Net of Allowa ble Reduction * Risk weight
= Consolidate total RWA = total RWA fo all exposures
Piller -I determing total exposure total exposor of abank for a borrowre is sum totoa 3 expo - o/s balan in fund based facilit - saction but unavialbed limits in fund based - exposure arising out of non-fund based Calsulation of credit expor allows for dduc - deposit under line - keeping approved collatersal expore on a/c of unavial portion of sanctio fund equal to (20% of un-drawn portion of fundbased excp TL) + (20% of undrw of port of TL to be dra in 1 year) + (50% of undr port of TL to be drawn after 1 year) un-drwan which is yeat to be disbursed NOn-fund based exposue - financial gurantees - Accptances - Performance gurantees - letter of Credit - Uncondition take out finance - Condition take out finance Computing credit equivalent of non-fund based exposure outstanding non-fun based facilit multiplie by corresponding Credit Conversion Factors (CCFs) by RBI * Allowble reduct = C * [1 - Hfx] * Mf c - current value of bank deposit HFx - 0 if the exp and the coll insame cure HFx = 0.08 if in another currec Mf - maturity factor given by RBI to adjust for mismatch in the maturity - approved financi collater allowable reduction = [C X (1 - Hc - Hfx) X Mf] - E x He E - expsoure of net of margin and allowab reduc on ac of lien depos C - current value of eligible financial collateral He - haircult appropriate to exposure given by rbi based upon couter part rating and maturity of transact between 0.5% and 25% Hc - haricul approra to collateral. value - 0(for govt) and 25% * 3 diff approach to calc opeartional risk - Basic Indicator approacH 15% ( ) then dividy by 0.09 * Minimum Capital requirement for Mkt risk Value at Risk (VaR)
approache for mkt risk
- standardies approach (matruity method) The general market risk (GMR) of band = The position entered in the band * risk wt of band * assumed change in yield of bank sum of gmr of all band will be gmr of portfolio Total capital for mkt risk = Total Gmr of the Portfolio + total specifid risk * duration method - cap charge for "specifi risk" given by rbi cap chargefor GMR = modified duration of security * assume change in yiled (by rbi) * Value of security in portfoli Capital charge for mkt risk for secuirty = cap charg for specifi risk security + cap charg for GMR for security total cap charge for mkt risk portfoli = the sum of the capital charge for mkt risk of all secir TRA for mkt risik = Total Capital chage / 0.09 * Internal model mothod - conssolid cRAR - Total Elibli capital / RWA (C o m) Totoal capital must be atleas 9% of the sum of RWa tire compo of asset atleast 6% of RWA * principles of Supervisory review