Question

Discuss the four capital ratios depository institutions must calculate and monitor under Basel III.

Answer 1

Answer:-

The four capital ratios depository institutions must calculate and monitor under Basel III are

Tier 1 capital : It has two components

1) Common equity tier 1 capital: It includes common stock, retained earnings, additional paid in capital and other comprehensive income excluding intangibles and deferred taxes. It's requirement as per Base III guidelines is 4.5% of Risk weighted assets (RWA)
2) Other tier 1 capital: It includes subordinated instruments with no specific maturity and no contractual dividends.

The minimum total tier 1 capital requirement which includes a and b is 6% of RWA.

3) Tier 2 capital : It includes instruments with original maturity of more than 5 years.

The Total capital of bank or the total adequacy ratio is Tier 1 capital plus Tier 2 capital and the total capital requirement is 8% of RWA.

The minimum capital adequacy ratio including the capital conservation buffer is 10.5%.

4) Leverage ratio: This is non-risk-based and is calculated by dividing Tier 1 capital by the bank's average total consolidated assets