Banking: Theory & Practice FINA3304: 2015 Group Assignment Task 1: Basel III – Capital adequacy
Basel III consists of a comprehensive set of reform measures intended to improve the regulation, supervision and risk management of the banking sector (APRA 2013). Being developed mainly in response to the credit crisis of 2007, it requires banks to maintain adequate leverage ratios and meet certain capital requirements. Basel III builds on the basis of previous Basel I and Basel II and is aimed at improving the banking sector’s ability to deal with financial stress and turmoil, strengthen the banking sectors transparency and improve risk management (Investopedia 2015).
In Australia, the Australian Prudential Regulatory Authority
…show more content…
Since 2010 APRA has been involved in the active implementation of a series of updates to its prudential standards to ensure consistency with the capital requirements of the Basel III framework. In September 2012 APRA published a ultimate set of prudential standards that address the foremost elements of the Basel III capital reforms in Australia. Subsequently, in November 2012 they also issued a package of final actions, including requirements for counterparty credit risk, which completed APRA’s implementation of the Basel III capital reforms for ADIs (McCoach 2014). Graph 1B (see appendix) shows how the minimum Tier 1 capital requirement have been increased, from 4 per cent to 6 per cent of risk-weighted assets, which will take effect once fully phased in. APRA required ADIs to meet its new capital requirements for CET1 capital and Tier 1 capital at the beginning of 2013, which was two years ahead of the phase-in deadline, and also required ADI’s to adhere to the full capital conservation buffer requirement at the start of 2016 as shown in Graph 1B (Reserve Bank of Australia 2013). Australia has implemented certain aspects of Basel III ahead of the scheduled timeline to ensure that banks and other ADI’s have a significant amount of time to prepare for implementation.
The predominant goal of the
The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions
b. List three differences you found between the accounts and features this bank or credit union offers and the bank from question 1 above. (1-3 sentences. 1.0 points)
In 2008, when the financial crisis occurred, millions of Americans were left without jobs and trillions of dollars of wealth was lost wealth. To make sure the Great Recession would not happen again, President Barrack Obama put into effect the Dodd- Frank Act. With the help of this law, banks will not be able to take irresponsible risks that had negative effects on the American people. Furthermore, with the Volcker Rule embedded into the act, it will ensure that banks are no longer allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their
1. a) A bank has risk-weighted assets of $175 and equity of $12.5. If regulators require a minimum risk-weighted capital ratio of 5% given the current level of equity, how many new assets with a 100% risk weight can the bank add? How many with a 50% risk weight? b) If the bank had 20% more equity, how many new assets with a 100% risk weight could the bank add? How many with a 50% risk weight? How does having more equity affect a bank's ability to grow? How is this growth affected by the riskiness of the bank's assets?
Accordingly, banking regulators assessed minimum values for each of these key measures. At 2007, “adequately capitalized” (i.e., minimum) levels were 4% for the Tier 1 capital ratio, 8% for the total capital ratio, and 3% for the leverage ratio; “well capitalized” levels were 6% for Tier 1 capital, 10% for total capital, and 5% for leverage. Well capitalized banks qualified for, among other things, lower premiums assessed by the Federal Deposit Insurance Corporation (FDIC). Undercapitalized banks (e.g., below the 8% minimum required total capital) received a warning from the FDIC; continued violation of capital requirements triggered further regulatory costs, including intervention or (in the extreme) takeover by government regulators.
The three types of capital mentioned in chapter 18 are, equity capital, economic capital, and regulatory capital. Equity capital, economic capital, and regulatory capital were established a capital standard for banks. Equity capital is defined as the book value of assets less the book value of liabilities. Furthermore, equity capital is also said to cushion debt and equity holders from unexpected losses. Regulatory capital includes the subordinated debt and some adjustments for off-balance sheet items. This is also different from economic capital, which is a statistical estimate of risk and capital, it also reflects the bank’s estimate of the amount of capital needed to support its risk-taking activities; it is not the amount of
The Dodd-Frank Act put a considerable burden on financial regulators whom have to work out the details in order to implement its vision. It includes a variety of points relating to the prevention of a future crisis (Kim & Muldoon 2015). Some of these major points include: (1) The creation of a new Financial Stability Oversight Council, comprising existing regulators, to be responsible for overseeing any financial institution or set of market circumstances determined to be likely to result in risk to the overall economy, (2) A reallocation of banking oversight responsibility among the Federal Reserve System, the Comptroller of the Currency, and the FDIC, requiring the Federal Reserve Board to supervise nonbank financial companies “that may
Firstly, the Dodd–Frank Act pushes forward the reformation of America's financial regulatory system. Several new regulatory authorities are set up to enhance the government supervision and administration of the industry. The Financial Stability Oversight Council is established to identify material risks to financial stability, with the support from Office of Financial Research. Moreover, Fed is entitled to exercise additional superintendence beyond banks.
Under TD Canada Trusts current capital structure, TD’s Tier 1 capital in October 2011 was $28.5 billion which had increased from $24.4 billion in the previous year. TD states that “the increase to Tier 1 capital was largely due to strong earnings, and a common share issuance” TD‘s capital ratios are measured by their financial strength and flexibility, and are calculated using guidelines provided by OFSI for capital adequacy rules including Basel II. OFSI will determine risk-adjusted capital, Risk Weighted Assets, and off-balance sheet exposures through the measurement of capital adequacy amongst the Canadian banks. There are two primary ratios used by OFSI to measure capital adequacy: Tier 1 capital ratio and Total capital ratio (refer to Appendix 2).
Investment Banking is now at a crucial junction, where Investment and Commercial Banking are splitting up due to the ring fence which is being built around these two banking areas. As well, the new upcoming regulation, Basel III, will have a huge impact in the investment banks, with higher liquidity and capital requirements, in order to increase solvency and stability in financial industries.
The United States Congress chartered the Second National Bank in 1816 in order to control unregulated currency at the state-level banks. After several states questioned the constitutionality of the bank, Maryland imposed a tax on all banks that were not chartered by the state. By 1818, Maryland approved legislation of taxing the Second National Bank of the United States that was chartered by Congress, which is part of the Federal Government.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, banks with total consolidated assets of more than $10 billion is required to conduct annual stress tests and the Board of Governors of the Federal Reserve System published its final stress test rule (12 CFR 252) which provided definitions and rules concerning scope, scenarios, reporting and disclosure. This rule continues to be a focus by the regulators to ensure banks are in
Briefly explain the rise and fall of LTCM. What was the moral hazard issue the fed was worried about? How did they try and get around the moral hazard issue? What specifically was the Fed's role in the bailout? What roles specifically did Bear play and not play in the LTCM's life and death?
Freire Speaks of education in schools as mindless and is only depositing phrases into student minds as if they were merely banks. This, he says, makes the people lack creativity even if the information in them is formally catalogued and available to be used at any time. The teacher, in his sense, needs to justify his or her existence by oppressing the students for their ignorance for what is knowledgable and what is not. The banking concept adheres to the wants of the teachers and make it so his or her pupils will not truly see the world and will not transform it. It makes the people easy to dominate and be fitted to a society that is controlling them. To break free from the oppression that the banking concept has force unto the people, the
The primary measure used by regulators and analysts to measure a bank’s capital strength is the Tier 1 capital ratio. Analyzing this ratio indicates the strength and the bank’s ability to