Report on Capital Adequacy
Under Basel II – RCA 2
First return developed on XBRL
Anujit Mitra (amitra@rbi.org.in)
Department of Banking Supervision, RBI
1
Approach for Basel II
 All commercial banks in India (excluding Local Area
Banks and Regional Rural Banks) to adopt
 Standardised Approach (SA) for credit risk
 Basic Indicator Approach (BIA) for operational risk
 Standardised Duration Approach (SDA) for computing
capital requirement for market risks
2
Timeline - achieved
 Mar 31, 2008 for all Foreign Banks operating in India and other
Indian Banks having operational presence outside India
 All other commercial banks (except Local Area Banks and Regional
Rural Banks) were encouraged to migrate to these approaches under
the Revised Framework in alignment with them but in any case not
later than March 31, 2009
3
Parallel Run
 Banks migrating to the revised framework were
advised to have parallel run and they have been
submitting the quarterly reports to their board and to
RBI
 Detailed return for the same has been introduced in
December 2009, this was the first return implemented
on XBRL platform by RBI
 The same was re-launched over Internet in March
2009
4
Migration to the Advanced
approaches - Flexibility
Banks, at their discretion, would have the option of
adopting the advanced approaches for one or more
of the risk categories, as per their preparedness,
while continuing with the simpler approaches for
other risk categories
It would not be necessary to adopt the advanced
approaches for all the risk categories
simultaneously.
5
Time Schedule for Advanced Approaches
Approach
The earliest date of
Likely date of
making application by approval by the
banks to the RBI
RBI
Internal Models Approach (IMA) for
Market Risk
01-Apr-10
31-Mar-11
The Standardised Approach (TSA) for
Operational Risk
01-Apr-10
30-Sep-10
Advanced Measurement Approach
(AMA) for Operational Risk
01-Apr-12
31-Mar-14
Internal Ratings-Based (IRB)
Approaches for Credit Risk
(Foundation- as well as Advanced IRB)
01-Apr-12
31-Mar-14
6
Presenting the system –
Users From RBI
• Administrator
– Manages Bank Master and creates Administrators for
those banks
– View system MIS reports and log
– Has full access right over all banks to view their returns
– May Reject returns submitted by the bank (s)
• Users
– Has predefined access right to view returns and generate
reports
7
Users from Banks
 Administrator
 Creates / deletes users from the banks and
defines the role of each user (maker-checker)
 Users
 Maker - Enabled to enter, modify and view data
but would not be able to submit data to RBI
 Checker - Enabled to view and submit data
8
Banks’ view of the system
 Accessible through the ORFS page – secure
access
 Data Preparation
 Login
 Download Excel Template
 Fill in data
 Validate - debug
9
Submission of Data
 Create Instance Document
 XBRL instance created – transparent to the user
 Save document
 Submit to RBI
 Encrypt with digital signature or symmetric
encryption
 Print for records, if required
10
Retrieve submitted returns
 After logging in user may be able to view /
download returns already submitted
 He may download the same and modify
 He may resubmit
11
Advanced approach
 Use the MIS to create the XML output or
even better – make use of the XBRL
 Upload document
 Submit to RBI
 Encrypt with digital signature or
symmetric encryption
12
Expected developments in RBI
 Further versions of RCA II – next one
possibly by December 2009
 Working group on OSMOS re-devolopment
 Reviewing the return structures
 May suggest quick XBRL adoption for all
OSMOS returns
 May suggest few new returns for Basel II
13
At RBI - Analysis of returns
 Through Standard reports
 Fixed format
 Frequently used
 Easy to generate and use
 Through Adhoc reports
 User to choose elements
 Downloadable to Excel for further Analysis
14
15
Analysis - A look at Capital
Adequacy
 Need for capital
 Acceptable capital standards
 Initiatives of Basel (BCBS)
 Basel I Accord
 Basel II Accord
 Risk assessment under Basel II
16
Need for capital
Supports bank’s operations (source of funds)
• Provides cushion against unexpected losses stemming
from credit, market and operational risks – thus
maintains solvency of a bank
• Encourages depositors’ confidence
• Encourages shareholders’ interest in governance of the
bank
• Regulatory comfort as bank insolvency is costly to the
economy
17
How much capital??
 Before Basel standards, regulators set minimum capital
requirements in absolute terms or as gearing ratio.
 After Basel, capital is aligned to the quantum of risks
carried by a bank.
 Elimination of probability of bank insolvency is not
possible hence the present capital standards aim to ensure
that a bank would not be insolvent under an acceptable
probability.
 Measuring losses to quantify the level of capital
requirement is the core issue.
18
Basel I Capital Accord
 Pioneered the international convergence on measuring banking







risks and defining capital standards
Essentially focused on standards for measuring credit risk (biggest
risk faced by banks)
Added explicit capital charge for market risks in 1996
Specified the minimum level of capital as a function of risk
weighted assets
Defined components of regulatory capital
Easy to understand and simple to implement
Helped to recognise the importance of capital in managing banking
risk
Besides G-10, adopted by over 100 countries
19
Basel I to Basel II
 Weaknesses of Basel I
 One size fits all approach
 Crude method of credit risk measurement However, measurement
of market risks is more scientific and aligned to reality
 Inadequate differentiation of credit risk
 Risk mitigation techniques not recognised
 No incentives for better risk management
 Not addressed all risks
 Encouraged regulatory arbitrage (securitisation and credit
derivatives)
 Hence the need for Basel II
20
Basel II Accord
 Extensive consultative process beginning June 1999
 Rests on three mutually reinforcing Pillars
 Quantum of capital linked to riskiness of exposure
 Covers capital charge for operational risk besides credit and market




risks
Provides a menu of options to calculate credit risk and operational risk
Incorporates supervisory review process to address risks not covered
under Pillar I and allows risk based supervision
Incentives for better risk management and control environment
through lesser capital requirement
Ensures market discipline through comprehensive disclosure
requirements
21
Basel I Vs. Basel II – All Banks CRAR
(as of Mar 2009)
(Amounts in Rs.Cr.)
Tier I Capital
Tier II Capital
Total Capital
Total RWA
CRAR
Core CRAR
Basel I
331,494
157,143
488,637
Basel II
333,810
154,016
487,826
3704,827
13.19
8.95
3488,303
13.98
9.57
22
Basel I Vs. Basel II - Foreign Banks
(as of Mar 2009)
(Amounts in Rs.Cr.)
Tier I Capital
Tier II Capital
Total Capital
Total RWA
CRAR
Core CRAR
Basel I
Basel II
51407
9203
60609
51811
9105
60916
403033
15.04
12.75
425327
14.32
12.18
23
Basel I Vs. Basel II – Nationalised
Banks
(Amounts in Rs.Cr.)
Tier I Capital
Tier II Capital
Total Capital
Total RWA
CRAR
Core CRAR
(as of Mar 2009)
Basel I
191053
116692
307745
Basel II
192268
114063
306331
2498398
12.32
7.65
2271344
13.49
8.46
24
Basel I Vs. Basel II – NPBs
(as of Mar 2009)
(Amounts in Rs.Cr.)
Tier I Capital
Tier II Capital
Total Capital
Total RWA
CRAR
Core CRAR
Basel I
72602
27944
100546
Basel II
73152
27756
100908
665762
15.10
10.91
658331
15.33
11.11
25
Basel I Vs. Basel II – OPBs
(as of Mar 2009)
(Amounts in Rs.Cr.)
Tier I Capital
Tier II Capital
Total Capital
Total RWA
CRAR
Core CRAR
Basel I
16360
3301
19662
Basel II
16579
3092
19671
137180
14.33
11.93
133301
14.76
12.44
26
Basel I Vs. Basel II – who benefitted
(as of Mar 2009)
•
Out of the 80 banks 49 banks shown higher CRAR
• 17 out of 30 foreign banks got CRAR lower under Basel II
• 9 out of 15 Old Private Sector Banks and 2 out of 7 New
Private Sector Banks shown higher CRAR under Basel II
• Only 6 out of 27 Nationalised Banks including SBI Group
have shown lower CRAR
• 35 banks have shown higher RWA under Basel II
27
Assessment of Capital Adequacy – Standardised
Approach
 A bank’s capital base is dynamic reflecting the success or otherwise of
the bank’s ongoing business of managing risks through its control
environment
 Analysis should broadly include
 Regulatory capital and
 Risk assets – on and off balance sheet
 Regulatory capital
 Level of capital adequacy ratio and trend over periods
 Quality – proportion of Tier I capital to total capital and trend over periods
 Components of Tier I capital
28
Assessment of Capital Adequacy –
Standardised Approach
 Extent of fixed charge on profitability and available
headroom – level of preference shares and debt
instruments
 Quality of Tier II capital – extent of revaluation reserves,
upper Tier II & lower Tier II components, available
headroom to raise further capital
 Trends in deductions from regulatory capital especially on
account of securitisation related exposures and intangible
assets
29
Assessment of Capital Adequacy –
Standardised Approach
 Risk Assets - on balance sheet – trends
 Absolute quantum, Composition, Quality, and
Riskiness
 Movements in credit, market and operational risk
 Reflects the direction of business strategy and risk
appetite
 Growth in quantum of risk assets to be compared in
relation to total assets and regulatory capital
30
Assessment of Capital Adequacy – Standardised
Approach
 Credit Risk Exposure (excluding securitisation)
 Counter party wise distribution
 Rating wise distribution
 Risk weight wise distribution
 Extent of credit risk mitigation (CRM) used to reduce risk
 Credit Risk Exposure (Securitisation)
 Level of exposures as originator and other than originator
 Rating wise & risk weight wise distribution
 Extent of exposures backed by commercial real estate, liquidity
facilities (drawn and undrawn)
 Risk adjusted exposures as % of total credit risk exposure, total risk
weighted assets and total assets
31
Assessment of Capital Adequacy –
Standardised Approach
 Credit Risk – Off Balance Sheet (OBS) Exposures
 Non Market related
Trends in quantum and composition of contingent credits &
commitments
 Volume of financial guarantees, undrawn committed lines of credit,
Letter of credits
 Share in total off balance sheet exposures
 Market related (Derivatives)
 Quantum and composition
 Maturity & potential future CCF wise distribution
 Trend in potential and current exposure
 Total OBS exposures as % of total on balance sheet assets

32
Assessment of Capital Adequacy
 Capital charge for failed transactions
 Securities transactions
 Foreign exchange transactions
 Market Risk Exposures
 Trends in capital charge
 Specific risk for securities held in HFT and AFS
 General market risk for securities held in HFT & AFS
 Equity position
 Foreign exchange and gold position
33
Assessment of Capital Adequacy
 Residual maturity wise securities held in (reflect
potential market risk exposure)
 HFT category
 AFS category
 Bonds of banks attracting higher capital charge due to
adverse CRAR
 Operational Risk
 Trends in capital charge
34
Assessment of Capital Adequacy
 Issues
 To provide input for Supervisory Review &
Evaluation Process (SREP) under Pillar II
 So deciding the trade off between
granularity to be captured and ease of
compilation / data management is crucial
35
Thank you !!!
36