Evaluating Basel

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END TERM PROJECT COMMERCIAL BANK MANAGEMENT TOPIC 5 BANK CAPITAL MANAGEMENT- CAPITAL ADEQUACY FRAMEWORK Submitted to: Submitted by: Group 5 Prof. D.N. Panigrahi Abhishek Singh (2014013) Anisha jain (2014042) Bakul Malik (2014072) Gurusha Godwani (2014100) Ketki Chaturvedi (2014133) CHAPTER 1 BANK CAPITAL MANAGEMENT- CAPITAL ADEQUACY FRAMEWORK INTRODUCTION Bank capital is often defined in tiers or categories that include shareholders' equity, retained earnings, reserves, hybrid capital instruments, and subordinated term debt. Capital ratios are commonly measured as a percent of bank assets or risk-weighted bank assets. Bank capital serves as an important cushion against unexpected losses. It creates a strong…show more content…
Banks list their capital adequacy ratios in their financial reports. The CAR is important to shareholders because it is an important measure of the financial soundness of a bank. Two types of capital are measured with the CAR. The first, tier 1 capital, can absorb a reasonable amount of loss without forcing the bank to cease its trading. The second type, tier 2 capital, can sustain loss in the event of liquidation. Tier 2 capital provides less protection to its depositors. Because of the nature of risk under which banks operate, capital regulations require banks to maintain a minimum level of equity per loans and other assets. This required minimum is designed for protection, allowing banks to sustain unanticipated losses. The minimum is also designed to offer depositors confidence in the security of their deposits given the asymmetric information. An individual depositor cannot know if a bank has taken risks beyond what it can absorb. Thus, depositors receive a level of assurance from shareholders' equity, along with regulations, audits and credit ratings. The amount of equity a bank receives from shareholders sets the limit on the value of deposits it can attract. This also limits the extent to which the bank can lend money. If a bank sustains large losses through credit or trading, eroding the bank’s net worth, this causes a decreased fund base through which a bank can offer loans. The CAR provides
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