What is the minimum capital adequacy ratio under Basel II?
8%
Currently, the minimum ratio of capital to risk-weighted assets is 8% under Basel II and 10.5% under Basel III.
What is Basel Accord explain the capital adequacy ratio?
The first Basel Accord, known as Basel I, was issued in 1988 and focused on the capital adequacy of financial institutions. Under Basel I, banks that operate internationally must maintain capital (Tier 1 and Tier 2) equal to at least 8% of their risk-weighted assets.
What is the minimum capital adequacy ratio under Basel I?
Banks are classified according to their risk and are required to maintain emergency capital based on that classification. According to Basel I, banks are required to keep capital of at least 8% of their determined risk profile on hand.
How much should the capital adequacy ratio be?
As of 2019, under Basel III, a bank’s tier 1 and tier 2 capital must be at least 8 per cent of its risk-weighted assets. The minimum capital adequacy ratio (including the capital conservation buffer) is 10.5 per cent.
What is included in Tier 2 capital?
2 Elements of Tier II Capital: The elements of Tier II capital include undisclosed reserves, revaluation reserves, general provisions and loss reserves, hybrid capital instruments, subordinated debt and investment reserve account.
What is RWA calculation?
Risk-weighted asset (also referred to as RWA) is a bank’s assets or off-balance-sheet exposures, weighted according to risk. This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio (CAR) for a financial institution.
Is high capital adequacy ratio good or bad?
What is the Capital Adequacy Ratio? When this ratio is high, it indicates that a bank has an adequate amount of capital to deal with unexpected losses. When the ratio is low, a bank is at a higher risk of failure, and so may be required by the regulatory authorities to add more capital.
What is meant by Tier 1 and Tier 2 capital?
Tier 1 capital is the primary funding source of the bank. Tier 1 capital consists of shareholders’ equity and retained earnings. Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and undisclosed reserves.
What is the meaning of Tier 1 and Tier 2?
Tier 1 refers to core capital while Tier 2 refers to items such as undisclosed resources.