Risk Management System
•Banks are required to identify, measure, monitor and control the overall level of risks undertaken by them.
•Risk Management Structure: Risk Management Deptt. /Committee.
•Loan Review Mechanism (LRM): evaluation of quality of loans and improvements in credit administration. •
•Credit Risk: Credit default & counterparty risk •
•Market Risk: Market risk arising from adverse changes in market variable such as interest rate, foreign exchange rate, equity price and commodity price •
–Liquidity Risk, Interest Rate Risk, Foreign Exchange Risk, Commodity Price Risk, Equity Price Risk –
•Operational Risk: Risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
Capital Adequacy for Banks
•Importance of capital for any organisation •
•Imp. Of stake •
•Capital helps absorb losses •
•Banks with low capital can`t increase business •
•DICGC cover only up to 1 lac •
Basel I Accord
•CAR- Bank of International Settlement- 1988
•Central Bank Governors-G – 10 Countries formed B.C.B.S. •
•8% of risk weighted assets ( RBI – 9%) •
• Only credit risk covered •
•In 1996, Market Risk also covered •
Basel II
•Basel II- Revised Framework considers capital requirement for not only credit & Market risks but also operational risks •
•Basel II has 3 pillars
•1) Min. Capital requirement
•2) Supervisory Review
•3) market Discipline
Tier I , II & III Capital
•Tier I Capital •Paid up equity capital+ disclosed reserves •Perpetual non cumulative pref. Shares-PNCPS
•Tier II Capital •Undisclosed reserves •revaluation reserves-55% •General provisions- ( max. Up to 1.25% of RWA ) •Hybrid ( debt / equity ) capital •Subordinated term Debt- over 5 years •This can be up to 50 % of Tier I •Tier II capital can be up to 100% of Tier I capital
•Tier III Capital •Short term subordinated Debt covering Market Risk( not to exceed 250 % of Tier I capital required to support Market Risks) •Investment in subsidiaries & securitised assets will be reduced from Tier I & Tier II capital 50% each
Supervisory Review- Pillar II
• •Need to consider systemic & other Bank specific risks as well
•4 Principles •1) Banks to have Internal system of assessing risks for computing capital •
•2) Supervisors to review system to strengthen them •
•3) To have > min. Capital required •
•4) Ensure Min. Capital required is not breached
Market Discipline- Pillar III
•Relates to disclosures: (as per Board approved Policy) •
•Disclosures be made through annual report/ website •
•To enable market participants to take an informed view •
•Capital structure •Capital adequacy •Credit/market/ operational risks
•Credit risk mitigates
•Securitisation disclosures •
BASEL III
Objectives of the Basel III:
1.Improve bank’s ability to absorb shocks from financial and economic stress ●
2. Improve risk management and governance ●
3. Strengthen banks’ transparency and disclosures. ●
•Takes care of Economic or Financial stress of Banks – Features •
•1) Better quality capital- equity raised from 2% to 4.5% of RWA •
•Capital conservation buffer- 2.5% of RWA for economic & financial risks •
•Counter Cyclical Buffer- Increase capital in good times- 0 to 2.5% of RWA
•Tier I capital raised from 4% to 6% • •
•Total CAR to be 8% + 2.5% or 10.5% •
•Leverage ratio – capital/ total assets to be 3% •
Implementation of Basel III in India- RBI Guidelines
•1) To be implemented effective 31.3.19
•2) Initially CAR will be lower & higher later
3) Counter Cyclical Buffer guidelines to be issued later
4) As against 8% , RBI prescribed 9% CAR
•5) Min. Equity for Tier I to be 5.5% instead of 4.5% & overall to be 7% instead of 6%
6) Capital conservation Buffer to be 2.5% of RWA
•7) Leverage Ratio to be 4.5% instead of 3% •
*****Be continue for Unit-09****
