The Regulatory Capital Is The Minimum Amount Of Capital

1903 WordsApr 26, 20168 Pages
Q1 (a) The regulatory capital is the minimum amount of capital that the financial regulator required the banks or the financial institutions to hold (Elizalde & Repullo, n.d.). It is used to help to avoid to risk and reduce the losses that we may have but can’t forecast. ("Bank Regulatory Capital – Quick Reference", 2016). The figure of the financial capital is directly set by the financial regulators. The balance sheet capital is the equity part that we recorded on the balance sheet. The regulatory capital is like a standard that all the financial institutions have to achieve. The financial institutions must maintain their capital amount over the minimum amount that the financial regulator required (Elizalde & Repullo, n.d.). However, the…show more content…
In 1988, the Basel I was published by the BCBS. It is a new method to the measure the capital and also it focused on the credit risk and appropriate risk-weighting of assets (International convergence of capital measurement and capital standards, 1988). Under the concept of the risk-weighted asset, the regulators can include the riskiness of the bank’s activities into the calculations of the capital adequacy (Lange, Saunders & Millon Cornett, 2015). “The core requirement of the Basel I were 2 capital ratios: a minimum 4% for the tier 1 capital ratio and the Total capital ratio for 8% (Lange, Saunders & Millon Cornett, 2015).” The tier 1 capital Ratio can be calculated by the (common equity- goodwill) / Risk-weighted assets (RWA) and the Total capital ratio can be calculated by Total regulatory capital / Total risk adjusted assets. Basel II In Basel II, it improved the measurement of the risk-weighted assets. It includes the market risk, the operational issues and the risks caused by the emergencies like the terrorisms or natural disasters (Lange, Saunders & Millon Cornett, 2015). The Basel II is more detailed than the Basel I. In the Basel II, it creates a new frame, the Three-pillar frame. The pillar 1 is the Minimum Capital Requirements. It is to maintain the regulatory capital of the FI by calculating the 3 main risks, the credit risk, market
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