Question

Scenario 3

The Central Bank of Oman (CBO) is the supervisor of all the banks in Oman. To protect the interest of the depositors the CBO place many controls such as statutory reserve requirements. The capital adequacy ratio (CAR) is one of the main ratios that the banks are required to be fulfilled to comply with CBO regulations.

Task 1

Explain the importance of maintaining the capital adequacy ratio (CAR) by every banking institution in Oman? Your explanation should be covered with different tiers and demonstrate your understanding of risk-weighted assets (RWA).

Answer 1

• Capital Adequacy Ratio is the ratio which is required to be maintained by banking institutions on directions of the Central Bank of Oman. Minimum Capital Adequacy Ratio is provided by CBO is 11% which may be subject to policy changes in future.
• CAR depicts bank's assets with respect to risk-weighted credit exposure.
• CAR is important as it is used to protect the public deposits from the risk of insolvency of banks.
• Capital Adequacy Ratio is calculated by using the following formula:
  
  =(Tier 1 Capital + Tier 2 Capital) / Risk Weighted Assets
  
  where,
• Tier 1 Capital compromises the core capital which is permanently available.
• Tier 2 Capital compromises unaudited retained earnings, General Loss Reserves.
• Risk-Weighted Assets is calculated under the Basel III framework where risk is determined for each asset. An asset with backed collateral is less risk-averse then assets with no collateral as they require more capital to cover the risk.
• Risk coefficients on asset is determined based on Asset's credit rating.
• Off-Balance Sheets exposure is also considered while considering risk-weighted assets.

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