Capital Adequacy And Internal Assessment System

1007 Words5 Pages
initiated by the governors of Central bank with a group of 10 countries. The reason behind this was to fill the gap between the international supervision so that: - 1) No banking institution can escape supervision. 2) Supervision would be adequate and consistent across members jurisdiction. Basel 2: - The framework of 1988 Accord needed to be revised with new rules and regulations in order to bring stability and clarity in the world which faced a lot of economic breakdown in early 2000. So, a revised framework in June 2004 was introduced with three basic pillars: - 1) Minimum capital requirements, which sought to develop and expand the standardized rules set out in the 1988 Accord. 2) Supervisory review of an institution's capital…show more content…
The modified definition eliminated the things that can be included as capital forcing the banks to increase their core capital which can be used in the time of emergency. 2) The minimum common equity tier increased from 2.5% to 4.5% of banks total RWA’s. An additional 2.5% of conservation buffer needs to be reserved. Depending on the jurisdiction, banks will have to keep 0%-2.5% of countercyclical buffer. The top 29 banks in the world will have to keep additional third buffer of 1%-2.5% of common equity only. 3) Products which are backed by high risk like derivatives and OTC the new accord has increased the capital charge required for the asset to promote more of risk free trades. 4) Considering the risk profile of banks, a non- risk based leverage ratio of 3% was formulated. 5) Looking at the big failures in the year 2008, the committee incorporated two new liquidity ratios i.e. liquidity coverage ratio, net stable funding ratio. This allows the banks to keep more of liquid capital which can be used for a period of a month in case of emergency. Enterprise risk management: - Almost a decade old risk management strategy which not only allows the organization to identify, assess and prepare for danger but also to identify on which risk they need to work actively and for which they need to devise a strategy. It aims to bring more clarity to all stakeholders and investors as a part of their annual report. All the
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