2016/10/3 Capital Requirements Capital Requirements Capital Adequacy Ratio(CAr) Example: calculating CAR a measure of the amount of a bank's core capit Cash expressed as a percentage of its risk-weighted asset Government bonds 15*0%=0 Tier 1 capital Tier 2 capital Mortgage loans 20 50%6=10 assets 50*100%=50 According to Basel Il, a commercial bank should Other assets 5*100%=5 keep its Car no lower than 8% for risk Risk-weighted as management purposes. car=- Equity value 7.69% Risk-weighted assets 6 Base| AccordⅢl Basel accordⅢ Basel Ill was developed in response to the In july 2013, the Fed announced that the minimum deficiencies in financial regulation revealed by the leverage ratio would be 6% for 8 systemically late-2000s financial crisis portant financial institution(SIFl)banks and 5% for quires banks to hold 4. 5% of common equity and their bank holding companies. 6% of Tier I capital of risk-weighted assets. In June 2012, CBRC set a minimum CAR for top banks Banks should maintain a leverage ratio--Tier1 of 9.5%(small banks 8.5%)by the end of 2013 capital over the banks average total consolidated CBRC also provided a 6-year grace period for banks assets--no lower than 3% of"systemic importance"to reach a minimum CAr of Banks should also maintain sufficient liquid assets to 11. 5%(smaller banks 10.5%)by the end of 2018 cover total net cash outflows over 30 days or amount over a 1-year period of extended stress. CAR in Chinese Banks Bank loan classification Normal otential weaknesses that deserve managements close attention. CAR in 2015 Mention the repayment prospects for Foreign Banks ected by the current nd paying capacity Rural Commercial Banks Standard ied must have a well-defined weakness, or weaknesses Com mercial Banks dize the liquidation of the Joint-stock Commercial Banks as ban kable 0%高%4%邰%%10%1%14%16%18%20% salvage value, but rather that it is g off this basically worthless asset2016/10/3 3 Capital Requirements • Capital Adequacy Ratio (CAR) – a measure of the amount of a bank's core capital expressed as a percentage of its risk-weighted asset. – According to Basel II, a commercial bank should keep its CAR no lower than 8% for risk management purposes. 2-13 Capital Requirements 2-14 Cash 10*0%=0 Government bonds 15*0%=0 Mortgage loans 20*50%=10 Other loans 50*100%=50 Other assets 5*100%=5 Risk-weighted assets 65 Basel Accord III • Basel III was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. • It requires banks to hold 4.5% of common equity and 6% of Tier I capital of risk-weighted assets. • Banks should maintain a leverage ratio——Tier1 capital over the bank's average total consolidated assets——no lower than 3%. • Banks should also maintain sufficient liquid assets to cover total net cash outflows over 30 days or amount over a 1-year period of extended stress. 2-15 Basel Accord III • In July 2013, the Fed announced that the minimum leverage ratio would be 6% for 8 systemically important financial institution (SIFI) banks and 5% for their bank holding companies. • In June 2012, CBRC set a minimum CAR for top banks of 9.5% (small banks 8.5%) by the end of 2013. • CBRC also provided a 6-year grace period for banks of "systemic importance" to reach a minimum CAR of 11.5% (smaller banks 10.5%) by the end of 2018. 2-16 CAR in Chinese Banks14.50% 11.60% 12.59% 13.14% 18.48% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Large Commercial Banks Joint-stock Commercial Banks City Commercial Banks Rural Commercial Banks Foreign Banks CAR in 2015 2-17 Bank Loan Classification Normal Special Mention has potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Standard is inadequately protected by the current sound worth and paying capacity of the obligator of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future Non Performing Loans 2-18