Basel III Accord: A Risk Management Framework
Basel III Accord: A Risk Management Framework
Udaya Raj Adhikari
Email: rajudaya98@gmail.com
Abstract
The Basel III framework is a central
element of the Basel Committee’s response to the global financial crisis. It
addresses a number of shortcomings in the pre-crisis regulatory framework and
provides a foundation for a resilient banking system that will help avoid the
build-up of systemic vulnerabilities. The framework will allow the banking
system to support the real economy through the economic cycle. The volume and growth of the capital in the economy
solely depends on the efficiency and intensity of the operations and activities
carried out in the financial sectors. One of the most important functions of
the financial system is share risk, which is centric due to financial institution.
The Basel Committee on Banking Supervision’s (BCBS) recommendations on capital
accord are important guiding frameworks for the regulatory capital requirement
to the banking industry all over the world and Nepal is no exception. Realizing
the significance of capital for ensuring the safety and soundness of the banks
and the banking system, at large, Nepal Rastra Bank (NRB) has developed and
enforced capital adequacy requirement based on international practices with an
appropriate level of customization based on domestic state of market
development.
Key Terms: Financial sector, Capital Adequacy Framework, Basel
1. Introduction
Basel
III is the third and the latest advancement of the Basel Accords and is a
global regulatory standard set by the BCBS on capital adequacy (including a new
leverage ratio and capital buffers), market liquidity risk (with new short-term
and long-term liquidity ratios) and stress testing focusing on stability. The
Basel III reforms to global regulatory standards were agreed by the G-20 in
November 2010 and were then issued by the Basel Committee on Banking
Supervision in December 2010 (BCBS, 2010). The key aim of these reforms is to
strengthen the capital adequacy requirements with regard to quality and
quantity of capital which banks must hold in order to absorb losses The Basel
III framework, whose main thrust has been enhancing the banking sector’s safety
and stability, emphasizes the need to improve the quality and quantity of
capital components, leverage ratio, liquidity standards, and enhanced
disclosures. Basel III is therefore an effort to control the causes of the most
recent crisis. Regulation of this sort has been effective in the past (BCBS,
2010)
Basel
III introduces new and enhanced rules, these includes the introduction of a new
and stricter definition of capital – designed to increase consistency,
transparency and quality of the capital base – and the introduction of a global
liquidity standard (BCBS, 2010). The two new liquidity ratios – the longer-term
Net Stable Funding Ratio (NSFR) and the short-term Liquidity Coverage Ratio
(LCR)–call on banks to raise high-quality liquid assets and acquire more stable
sources of funding, ensuring that they are in agreement with the principles of
liquidity risk management. In addition, Basel III introduces a new leverage
ratio, a substitute to the risk-based Basel II framework. By setting 3 percent
as the ratio of Tier 1 Capital to total exposure, the new leverage ratio may
limit banks’ scope of action (BCBS, 2010). Moreover, Basel III increases
capital requirements for securities financing activities, repurchase agreements
and counterparty credit risk arising from derivatives. Additionally, the new
framework has formulated ways of reducing systemic risk and the cyclical
effects of Basel II. For instance, it introduces a countercyclical capital
buffer and capital conservation, and discusses “through the- cycle”
provisioning. Basel III is poised to have a significant impact on the world’s
financial systems and economies. The implications for the banking industry from
Basel III could be profound. According to BCBS (BCBS, 2010) new minimum capital
standards changes combined with the higher capital charges for trading books
make some business models less profitable or even unprofitable going forward
and banks will need to rethink their strategy and business portfolio in the
light of the changes. The potential impact of Basel III on the banking system
is significant. Banks will experience increased pressure on their Return on
Equity (RoE) due to increased liquidity and capital costs. In particular, Basel
III creates incentives for banks to improve their operating processes – not
only to meet requirements but also to increase efficiency and lower costs
(BCBS, 2010). Banks are forced to improve their capital buffers through
increased capital adequacy requirements, as well as the introduction of
liquidity requirements and countercyclical macro prudential measures (BCBS,
2010).
Table 1: Basel Committee on Banking Supervision reforms
|
Pillar
1 |
Capital |
Risk Coverage |
Containing Leverage |
|
Capital
|
Quality
and level of capital ·
Raising minimum
common equity
to 4.5% of risk weighted assets, after
deductions. ·
A capital
conservation buffer Comprising common
equity of 2.5% of risk-weighted assets brings the total common equity
standard to 7%. Constraints on a bank’s discretionary distributions will be
imposed when it falls into the buffer range ·
A
countercyclical buffer within a range
of 0–2.5% comprising common equity will apply when credit growth is judged to
result in an unacceptable build-up of systematic risk Capital loss absorption at the point of
non-viability ·
Allowing
capital instruments to be written off or converted to common shares if the
bank is judged to be non-viable. This will reduce moral hazard by increasing
the private sector’s contribution to resolving future banking crises |
Revisions to the standardized approaches
for calculating ·
Credit
risk ·
market risk ·
credit
valuation adjustment risk and ·
operational risk mean
greater risk-sensitivity and comparability. Constraints on using internal models aim to reduce
unwarranted variability in banks’ calculations of risk-weighted assets. Counterparty credit risk More
stringent requirements for measuring exposure; capital incentives to use
central counterparties for derivatives; a new standardized approach; and
higher capital for inter-financial sector exposures. Securitisations
Reducing
reliance on external ratings, simplifying and limiting the number of
approaches for calculating capital charges and increasing requirements for
riskier exposures. Capital requirements for exposures to
central counterparties (CCPs) and equity investments in funds to ensure
adequate capitalisation and support a resilient financial system. A revised output floor, based on Basel
III standardised approaches, limits the regulatory capital benefits that a
bank using internal models can derive relative to the standardised approaches |
A
non-risk based leverage ratio including off-balance sheet exposures is meant
to serve as a backstop to the risk-based capital requirement. It also helps
contain system wide build-up of leverage. |
|
|
Risk management and supervision |
Risk management and supervision |
|
|
Pillar
2 |
Supplemental Pillar 2 requirements address
firm-wide governance and risk management, including the risk of off-balance
sheet exposures and securitisation activities, sound compensation practices,
valuation practices, stress testing, corporate governance and supervisory
colleges. |
Interest rate risk in the banking book
(IRRBB)
Extensive guidance on expectations for a bank’s IRRBB management process:
enhanced disclosure requirements; stricter threshold for identifying outlier
banks; updated standardised approach. |
|
|
|
|
|
|
|
|
Market discipline |
|
|
|
Pillar
3 |
Revised Pillar 3 disclosure requirements Consolidated
and enhanced framework, covering all the reforms to the Basel framework.
Introduces a dashboard of banks’ key prudential metrics |
|
|
|
|
|
|
|
|
|
Global
liquidity standards and supervisory monitoring |
|
|
|
Liquidity |
The Liquidity Coverage Ratio (LCR) requires banks
to have sufficient high-quality liquid assets to withstand a 30-day stressed
funding scenario that is specified by supervisors. |
The longer-term, structural Net Stable
Funding Ratio (NSFR)
is designed to address liquidity mismatches. It covers the entire balance
sheet and provides incentives for banks to use stable sources of funding. |
The
Committee’s 2008 guidance Principles for Sound
Liquidity Risk Management and Supervision takes account of lessons
learned during the crisis. It is based on a fundamental review of sound
practices for managing liquidity risk in banking organizations. Supervisory monitoring The liquidity
framework includes a common set of intraday and longer-term monitoring
metrics to assist supervisors in identifying and analyzing liquidity risk
trends at both the bank and system-wide level. |
2. Objectives of
the Framework
The main objective of this
framework is to develop safe and sound financial system by way of sufficient
amount of qualitative capital and risk management practices.
·
The
Accord is adequate to protect its depositors and creditors.
·
The
Accord is commensurate with the risk associated activities and profile of the
banks.
·
The
Accord promotes public confidence in the banking system.
·
The Accord should continue to
promote safety and soundness in the financial system
·
The Accord should continue to
enhance competitive equality.
·
The Accord should constitute a more
comprehensive approach to addressing risks.
·
The Accord should focus on
internationally active banks, although its underlying principles should be
suitable for application to banks of varying levels of complexity and
sophistication.
3. Pre-requisites of the Framework
The effective implementation
of this framework is dependent on various factors. Some such prerequisites are:
·
Implementation of Basel Core Principles for effective Banking
Supervision
·
Adoption of the sound practices for the management of Operational Risk
·
Formulation and adoption of comprehensive risk management policy
·
Adherence to high degree of
corporate governance
4. BASEL III implementation
i.
Nepal with Basel III
BIS issued "Basel III" : A global
regulatory framework for more resilient banks and banking system in 2010 in
order to strengthen global capital and liquidity rules with the goal of
promoting more resilient banks and revised it in 2011.
With
a view of adopting the international best practices, NRB has already issued the
Basel III implementation action plan and expressed its intention to adopt the
Basel III framework, albeit in a simplified form. In line with the
international development and thorough discussion with the stakeholders,
evaluation and assessment of impact studies at various phases, this framework
has been drafted. This framework provides the guidelines for the implementation
of Basel III framework in Nepal. The Basel III capital regulations continue to
be based on three-mutually reinforcing Pillars, viz. minimum capital
requirements (Appendix I), supervisory review of capital adequacy, and
market discipline of the Basel II capital adequacy framework.
Basel
III reforms strengthen the bank-level i.e. micro prudential regulation, with
the intention to raise the resilience of individual banking institutions in
periods of stress Besides, the reforms have a macro prudential focus also,
addressing system wide risks, which can build up across the banking sector, as
well as the procyclical amplification of these risks over time. These new
global regulatory and supervisory standards mainly seek to raise the quality
and level of capital (Pillar 1) to ensure that banks are better able to absorb
losses on both a going concern and a gone concern basis, increase the risk
coverage of the capital framework, introduce leverage ratio (Appendix
III) to serve as a backstop to the risk-based capital measure, raise
the standards for the supervisory review process (Pillar 2) and public
disclosures (Pillar 3) etc. The macro prudential aspects of Basel III are
largely enshrined in the capital buffers (Appendix II). Both the buffers i.e.
the capital conservation buffer and the countercyclical buffer are intended to
protect the banking sector from periods of excess credit growth.
Therefore, BCBS formulated six frameworks relating
to Basel III.
·
The
liquidity coverage ratio and liquidity risk monitoring tools,
·
Guidance for national authorities
operating the countercyclical capital buffer,
·
Basel III: the net stable funding ratio,
·
Basel III leverage ratio framework
and disclosure requirements,
·
Global systemically important
banks: updated assessment methodology and the higher loss absorbency
requirement; and
·
A framework for dealing with
domestic systemically important banks
The
reform was a response to financial crisis 2008 and to improve the banking
sectors ability to absorb the loss on a going concern basis. The fundamental
reasons of crisis were:
·
Excessive on and off balance sheet
leverage
·
Erosion of level and quality of
capital
·
Insufficient liquidity buffers in
banks
The
reforms in capital accord were made to addresses the lessons learned for the
financial crisis and make banks to absorb losses and includes but not limited
to:
·
Tightening of capital ratios and
strengthening of quality of capital
·
Introduction of Buffer Capital requirement and
non-risk based leverage ratio
·
Introduction of liquidity rules
·
Systematically Important Financial
Institutions measure
·
Changes in Counterparty risk
measurement etc.
Accordingly,
NRB has issued directives to Commercial Banks to parallel run the New Capital
Adequacy Framework designed based on Basel III requirement as in below (fig 1).
Fig
1: Elements of Basel III Source:
NRB, Unified Directives 2020
ii.
China With Basel
III
In the past Chinese banks were famously
undercapitalized and their loan portfolio were of rather dubious quality. For
example in 2003, on average the banking system showed an overall equity to
asset ratio of just 3.25%. Rural credit cooperatives had produced even a
negative ratio with -0.52%. Since then, the banks have had a lot of homework to
do: from recapitalization exercises to further improvements in internal
controls and loan cleaning. So far as to result in capital adequacy ratios
(CAR) for commercial banks of 10.2% by end-2011 (and even 12.7% for the total
capital adequacy). Now all or almost all commercial banks are compliant with
the Bank for International Settlements (BIS) required 8%.
To reach such levels, the regulators went out of their
way to revolutionise the way banking and banking supervision in done in China.
In the past, the central goal in the banking sector
was the gathering of deposits. Therefore the loan-to-deposit ratio was the
single most important performance indicator: it was the fundament for paying
bonuses, for developing business targets and for judging branch business
effectiveness. All relied heavily on this single figure because, in the absence
of an efficient money market, asset growth could only be achieved through
deposit growth. Furthermore, each branch had to be self-sufficient in terms of funding
because deposit transfers between branches, across provinces were forbidden.
Regulation and compliance were all based on the loan-to-deposit ratio (set at
75%). As a consequence, capital and capital adequacy were not on the mind of
neither bank managers nor bank regulators and capital constraints were unheard
of. Such strong deposit growth disregarding asset quality and capital adequacy
also favored the building up of non-performing loans (NPLs). Even though the
rules issued in 2004 took into account only some of the new developments in
Basel II, the CBRC continued straight on its trajectory of yet stricter
requirements. Over time it has in fact managed to become even more stringent
than Basel III (fig 2). These efforts have pushed Chinese banks in a fully new
direction and lead their risk management to much higher quality – albeit
starting from a really low base. With its pillars 2 and 3 in addition to highly
complex risk calculations, the capital accord dubbed Basel II was always going
to have a strong impact on Chinese banks and their environment. This is mainly
due to the fact that Basel II and the whole risk management framework are at a
stark contrast to the Chinese banking reality. The challenges for China with
Basel II range from capital and risk management to data and disclosure, as well
as organizational structures, incentive compatibility (between banks and
regulators), market-oriented supervision and the fostering of financial
innovation.
Fig 2: Timeline of Basel Accords
implementation internationally and in China
The
enhancements of Basel III over Basel II come primarily in four areas as
discussed below.
(i)
Higher
Capital Requirement: As can be seen from the comparative data in the
Appendix I, Basel III requires higher and better quality capital. The minimum
total capital remains unchanged at 8 per cent of risk weighted assets (RWA).
However, Basel III introduces a capital conservation buffer of 2.5 per cent of
RWA over and above the minimum capital requirement, raising the total capital
requirement to 10.5 per cent against 8.0 per cent under Basel II. This buffer
is intended to ensure that banks are able to absorb losses without breaching
the minimum capital requirement, and are able to carry on business even in a
downturn without deleveraging. This buffer is not part of the regulatory
minimum; however, the level of the buffer will determine the dividend
distributed to shareholders and the bonus paid to staff.
(ii)
Liquidity
Standards: To mitigate liquidity risk, Basel III addresses both
potential short-term liquidity stress and longer-term structural liquidity
mismatches in banks’ balance sheets. To cover short-term liquidity stress,
banks will be required to maintain sufficient high-quality unencumbered liquid
assets to withstand any stressed funding scenario over a 30-day horizon as
measured by the liquidity coverage ratio (LCR). To mitigate liquidity
mismatches in the longer term, banks will be mandated to maintain a net stable
funding ratio (NSFR). The NSFR mandates a minimum amount of stable sources of
funding relative to the liquidity profile of the assets, as well as the
potential for contingent liquidity needs arising from off-balance sheet
commitments over a one year horizon. In essence, the NSFR is aimed at
encouraging banks to exploit stable sources of funding.
(iii)
Provisioning
norms: The Basel Committee is supporting the proposal for adoption of
an ‘expected losses based measure of provisioning which captures actual losses
more transparently and is also less procyclical than the current ‘incurred
loss’ approach. The expected loss approach for provisioning will make financial
reporting more useful for all stakeholders, including regulators and
supervisors.
(iv) Disclosure
requirement: The disclosures made by banks are important for market
participants to make informed decisions. One of the lessons of the crisis is
that the disclosures made by banks on their risky exposures and on regulatory
capital were neither appropriate nor sufficiently transparent to afford any
comparative analysis. To remedy this, Basel III requires banks to disclose all
relevant details, including any regulatory adjustments, as regards the
composition of the regulatory capital of the bank.
6. Guidelines and
Impact of Basel III
The following are the Basel III guidelines:
·
A full reconciliation of all regulatory capital elements back to the
balance sheet in the audited financial statements.
·
Separate disclosure of all regulatory adjustments and the items not deducted
from CFT1 because of the threshold deductions.
·
A description of all limits and minima, identifying the positive and
negative elements of capital to which the limits and minima apply- primarily
the relevant minimum requirements on total regulatory capital and its
components and any boundaries around regulatory deductions.
·
A description of the main features of capital instruments issued.
·
A comprehensive explanation of the methods used to calculate any ratios
that have not been defined or are not required, by the regulatory framework,
but which involve the components of regulatory capital.
·
The full terms and conditions of all instruments included in regulatory
capital to be published on the relevant bank's website.
·
The specific components of capital that are benefiting from
transitional arrangements.
The three
impact of Basel III can be discussed in following table.
|
Capital |
Liquidity |
Earning |
|
·
Nepalese
banks have very low level of exposures in trading book, securitized
instruments and derivatives. Therefore, there is very minimum probability of
increase in risk assets as a result of implementation of Basel III. ·
Regulatory
Minimum capital requirement of 6% for Tier 1 and 10% total capital, which are
higher by 2 percentage points as compared to the Basel II requirements. ·
However,
if Nepal Rastra Bank requires bank to increase capital buffers subsequently
by 2.5 % for each of the buffers, Nepalese banks will have the burden of
increasing capital by 2.5% -5% in additional to the present level of minimum
requirements. ·
Paid
up capital, general reserve and retained earnings are the components of
common equity tier 1 (CET1) capital under Basel III. Paid up capital of the
most the Nepalese banks are already higher than the CET1 ratio of prescribed
by Basel III. ·
Introduction
both capital conservation buffers, countercyclical buffer and initiating new
capital adequacy requirements as per Basel III will need a rigorous exercise
in Nepal. |
·
Some
liquidity indicators like CRR (5%), SLR (12%), and CCD Ratio (80%) and net
liquid assests to total deposit ratio (20%) are already in place. ·
All
these requirements are mandatory: Moreover, the liquidity-monitoring framework,
which is very similar to LC Ratio of Basel III, is under implementation
process. All of the banks are maintaining NRB liquidity requirements at
present. ·
Initiating
new liquidity requirement as per Basel III will not be a very new and complex
issue in the context of Nepal. However, some exercise is necessary to
initiate the Net Stable Funding Ratio (NSFR). |
·
Studies
have concluded that Implementing Basel III will have an impact of
profitability of the banks. Such Studies show that Basel III would reduce
return one equity (ROE) for the average bank by about 4 percentage points in
Europe and about 3% points in the united States.(Mckinsey & Company) ·
In
case of Nepal, the impact of Basel III in earning is likely to be less than
that of Europe (4%) and USA (3%) since there will not be a significant level
of additional capital requirements for the securitized assets, derivatives
and trading portfolios. |
5. Conclusion
The
Basel Committee on Banking Supervision (BCBS) released a comprehensive reform
package entitled “Basel III: A global regulatory framework for more resilient
banks and banking systems” (known as Basel III capital regulations) in December
2010. Basel III reforms are the response of the Basel Committee on Banking
Supervision (BCBS) to improve the banking sector's ability to absorb shocks
arising from financial and economic stress, whatever the source, thus reducing
the risk of spill over from the financial sector to the real economy. Basel III
reforms strengthen the bank-level i.e. micro prudential regulation, with the
intention to raise the resilience of individual banking institutions in periods
of stress. It represents
a significant milestone in the development of uniform capital requirements. In
particular, Basel III's emphasis on the quality and quantity of core capital -
with the overriding goal of fortifying bank capital cushions on a global basis
- is the framework's very cornerstone.
Furthermore, in attempting to correct the
flaws of Basel I and Basel II, the BCBS has designed a regime that incorporates
liquidity requirements as well as a number of macro-prudential tools directed
at the reduction of systemic risk. None of these reforms, however, are expected
to be implemented inexpensively. Capital is indeed critical, but capital is
also costly. Over the next few years, regulators must necessarily weigh Basel
III's costs and benefits at each stage of the new regime's implementation. At
the same time, banks around the world must alter their business models to
varying degrees in order to thrive under Basel III.
6. References
·
BCBS. (2010). Basel III: A global
regulatory framework for more resilient banks and banking systems. Basel: Bank
for International Settlements.
·
BCBS. (2010). Basel III: A global
regulatory framework for more resilient banks and banking systems. Basel: Bank
For International Settlements
·
BCBS (2010). Results of the
Comprehensive Quantitative Impact Study. Basel: Bank for International
Settlements.
·
Cousin, Violaine. (2012). Basel I,
II, and III – we want it all at once. Retrieved from https://www.researchgate.net/publication/241765961_Basel_I_II_III_we_want_it_all_at_once/citations#fullTextFileContent
·
Mehta,
M., & Shakdwipee, P. (Eds). (2017) .From Basel I to Basel II to Basel III.
Nextgen Research Publication .International Journal of New Technology and
Research (IJNTR). Volume-3, Issue-1, January 2017 Pages 66-70.
·
Edu Pristine. (2011). Basel-III
Introduction to Basel - III and Key Enhancements. Pristine.
Online Reference
Nepal Rastra
Bank www.nrb.org.np
Banking for
International Settlement www.bis.org.np
International
Monetary Fund www.imf.org.np
Appendix I: Requirements
of Capital
Definition
of Capital
a.
Tier 1 capital (Core Capital)
A. Common
Equity Tier 1 (CET 1)
B. Additional
Tier 1 (AT 1)
b.
Tier 2 Capital (Supplementary
Capital)
Tier
1 capital (Core Capital)
This
capital must be fully paid up, have no fixed servicing or dividend costs
attached to it and freely available to absorb losses ahead of general
creditors.
It
consists of:
A. Common
Equity Tier 1 Capital:
1.
Common shares issued – that meet
the criteria for classification as common shares for regulatory purposes eg all
common shares should have voting rights, paid at last at the time of
liquidation, principal is perpetual and never repaid, classified as equity
shares
2.
Stock surplus ( share premium)
3.
Statutory General Reserves
4.
Retained earnings
5.
Unaudited current year profit
(after the provision of bonus and taxes)
6.
Capital Redemption Reserve
7.
Capital Adjustment Reserve
8.
Dividend Equalization Reserve
9.
Any other free reserves
10. Any
other Reserve notified by NRB
11. Less:
Regulatory Deductions
B.
Additional Tier 1 (AT 1):
a.
Perpetual Non-cumulative preference
shares (PNCPS) and perpetual debt Instruments (PDI) which are fully paid up.
b.
Stock surplus (share premium)
resulting from issue of PNCPS
Tier
2 Capital (Supplementary Capital): Same as BASEL II except stock surplus
resulting from issue of PNCPS included in Tier 2 capital
Deduction
from Tier 1 Capital
a.
Goodwill and all other
intangible assets
b.
Miscellaneous Expenditure eg VRS
expenses, preliminary expenses, deferred revenue expenses, patents, copyrights
etc
c.
Investment in equity of B&FI
(except investment in shares of Rural Development Banks)
d.
Investment in equity of
institutions with financial interest eg Insurance Companies share
e.
Investment in equity of intuitions
in excess of prescribed limit
f.
Investment arising out of
underwriting commitments that have not been disposed within a year from the
date of commitments
g.
Reciprocal crossholdings of bank
capital artificially designed to inflate the capital position of the Bank
h.
Any other Reserve notified by NRB
i.
Deferred
Tax assets
j.
Cash Flow
Hedge Reserve
k.
Defined
benefit Pension Fund assets and liabilities
Summary of capital Requirements
|
|
Mid
July 2018 (Ashad
end 2075 |
Mid
July 2019 ( Ashad end 2076) |
|
Minimum
Common Equity Capital (Tier 1 ) Ratio |
4.5% |
4.5% |
|
Capital
Conservation Buffer |
2% |
2.5% |
|
CET
+ CCB |
6.5% |
7% |
|
Minimum
Tier 1 Capital ( excluding CCB) |
6% |
6% |
|
Minimum
Total Capital (excluding CCB) |
9% |
8.5% |
|
Minimum
Total Capital (including CCB) |
11% |
11% |
|
CounterCyclic
Buffer |
0-2.5% |
0-2.5% |
In
short:
CET
1= 4.5% AT
1=1.5%
T
1= 6% CCB=
2.5%
T1
+ CCB= 8.5% T1 + CCB+
T2 = 11%
Counter
Cyclic buffer =0-2.5%
Appendix
II: Capital Buffer
·
Capital Conservation Buffer:
CCB
is designed to ensure that banks build up capital buffers during normal times
which can be drawn during a stressed period. CCB can be drawn down only when a
bank faces a systematic stress such as adverse economic environment. At
present it is 2.5 % of RWE.
Bank
shall not pay any dividend or bonus in any form in case capital falls below
this level.
·
Counter Cyclical Buffer:
Losses
incurred in the banking sector may be extremely large in a period of useless
credit growth. The financial system may be unstable due to this loss and
affects the whole economy. CCB aims to ensure that banking sector capital
requirements take account of the macro financial environment in which it
operate. So, its purpose is to protect the banking sector by using the Buffer
capital at the period of excess credit growth and remain solvent through a
period of stress.
NRB
has adopted the credit to GDP ratio as a guide for determining buffer
decisions. If credit to GDP(Gap) (i.e. GDP(Gap)= Credit
to GDP ratio) is high, it shows excessive credit growth means more CCB is
required. It varies from 0 to 2.5%.
Appendix III: Leverage
Leverage
Ratio
It is introduced as an additional protection for Banks during the crisis.
Leverage Ratio = Capital Measure/Exposure Measure
At present it is 4% and maintained quarterly.
Other
Provisions like:
a)
SIFI( Systemically Important
Financial Institutions)
b) Forward
looking and Dynamic Provisions
Are
introduced to strengthen and make stake banking systems even during the stress
period on the overall economy.
Comments