Capital Adequacy and Risk Management in Banks

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CAPITAL ADEQUACY FRAMEWORK AND RISK MANAGEMENT IN BANKS GUEST LECTURE: MR. R M PATTANAIK EX GM- INDIAN OVERSEAS BANK CAPITAL ADEQUACY RATIO (CAR) Also known as Capital to Risk (Weighted) Assets Ratio (CRAR) is the ratio of a bank’s capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory capital requirements. It is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being…show more content…
* Basel 3: Basel III is part of the continuous effort made by the Basel Committee on Banking Supervision to enhance the banking regulatory framework. It builds on the Basel I and Basel II documents, and seeks to improve the banking sector's ability to deal with financial and economic stress, improve risk management and strengthen the banks' transparency. BASEL-I vs. BASEL-II THE 3 PILLARS OF BASEL II Basel – II norms are based on 3 pillars: * MINIMUM CAPITAL – Banks must hold capital against 8% of their assets, after adjusting their assets for risk. Capital for credit risk, market risk and operational risk. * SUPERVISORY REVIEW – It is the process whereby national regulators ensure their home country banks are following the rules. This pillar works on 4 principles: 1. Measurement of own risk and capital adequacy of banks (ICAAP) 2. Supervisory review of internal banking procedures (SREP) 3. Capital above the regulatory minimum 4. Supervisory action: intervention at an early stage to prevent slippage. * MARKET DISCIPLINE – It is based on enhanced disclosure of risk. This pillar compliments Pillar 1 and Pillar 2. 5. Encourages disclosure requirements to enable market participants to assess the capital adequacy of the bank. 6. Disclosure of qualitative and quantitative aspects pertaining to: scope of
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