Question

(ii) Explain how banks in Ghana apply Bank Capital under the Basel Acord​​​​​​ ​​​​​

(iii) What is the significance of the Capital Adequacy Ratio in Ghana?

Answer 1

(ii) Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%. The capital adequacy ratio measures a bank's capital in relation to its risk-weighted assets. The capital-to-risk-weighted-assets ratio promotes financial stability and efficiency in economic systems throughout the world.

Basel III Capital Adequacy Ratio Minimum Requirement

The capital adequacy ratio is calculated by adding tier 1 capital to tier 2 capital and dividing by risk-weighted assets. Tier 1 capital is the core capital of a bank, which includes equity capital and disclosed reserves. This type of capital absorbs losses without requiring the bank to cease its operations; tier 2 capital is used to absorb losses in the event of a liquidation.As of 2020, under Basel III, a bank's tier 1 and tier 2 minimum capital adequacy ratio (including the capital conservation buffer) must be at least 12.5% of its risk-weighted assets RWA). That combines tier 1 and tier 2 requirements—the minimum tier 1 capital ratio is 10.5% and the minimum tier 2 is 2%. The capital conservation buffer recommendation is designed to build up banks' capital, which they could use in periods of stress.

(iii)Bank capital to assets ratio (%) in Ghana was 15.78 as of 2018. Its highest value over the past 10 years was 15.78 in 2018, while its lowest value was 10.41 in 2008.The minimum capital adequacy ratio is 10 per cent of the bank's assets. The capital ratio is a percentage of the adjusted capital base to the risk-weighted financial exposure as on 2019