How do you calculate Basel capital adequacy ratio?

It is calculated by dividing Tier-1 capital by a bank’s average total consolidated assets and certain off-balance sheet exposures.

How do you calculate Basel 3?

Basel III introduced a minimum “leverage ratio”. This is a transparent, simple, non-risk-based leverage ratio and is calculated by dividing Tier 1 capital by the bank’s average total consolidated assets (sum of the exposures of all assets and non-balance sheet items).

How is RWA calculated?

Banks calculate risk-weighted assets by multiplying the exposure amount by the relevant risk weight for the type of loan or asset. A bank repeats this calculation for all of its loans and assets, and adds them together to calculate total credit risk-weighted assets.

What new ratio is included in Basel III?

Under Basel III, the minimum total capital ratio is 12.9%, whereby the minimum Tier 1 capital ratio is 10.5% of its total risk-weighted assets (RWA), while the minimum Tier 2 capital ratio is 2% of the RWA.

What is minimum capital adequacy ratio?

Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%. 1 The capital adequacy ratio measures a bank’s capital in relation to its risk-weighted assets. With higher capitalization, banks can better withstand episodes of financial stress in the economy.

What is included in Tier 2 capital?

2 Elements of Tier II Capital: The elements of Tier II capital include undisclosed reserves, revaluation reserves, general provisions and loss reserves, hybrid capital instruments, subordinated debt and investment reserve account.

How do you interpret capital adequacy ratio?

A bank with a high capital adequacy ratio is considered to be above the minimum requirements needed to suggest solvency. Therefore, the higher a bank’s CAR, the more likely it is to be able to withstand a financial downturn or other unforeseen losses.

How is capital adequacy of a bank measured?

The capital adequacy ratio is calculated by dividing a bank’s capital by its risk-weighted assets. The capital used to calculate the capital adequacy ratio is divided into two tiers.

What is capital requirement ratio?

A capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets.

What is risk weighted capital ratio?

Capital Adequacy Ratio (CAR) is 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.

What are capital ratios for banks?

The capital ratio is the percentage of a bank’s capital to its risk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is dictated under the relevant Accord. Basel II requires that the total capital ratio must be no lower than 8%.