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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

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Approach for Basel IIAll 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

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Timeline - achievedMar 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

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Parallel RunBanks 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

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Migration to the Advanced approaches - FlexibilityBanks, 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.

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Time Schedule for Advanced Approaches

ApproachThe earliest date of

making application by banks to the RBI

Likely date of approval by the

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

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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

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Users from BanksAdministrator

Creates / deletes users from the banks and defines the role of each user (maker-checker)

UsersMaker - Enabled to enter, modify and

view data but would not be able to submit data to RBI

Checker - Enabled to view and submit data

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Banks’ view of the systemAccessible through the ORFS page –

secure accessData Preparation

LoginDownload Excel TemplateFill in dataValidate - debug

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Submission of DataCreate 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

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Retrieve submitted returnsAfter logging in user may be able to view / download returns already submitted

He may download the same and modify

He may resubmit

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Advanced approachUse the MIS to create the XML

output or even better – make use of the XBRL

Upload documentSubmit to RBI

Encrypt with digital signature or symmetric encryption

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Expected developments in RBIFurther versions of RCA II – next

one possibly by December 2009Working group on OSMOS re-

devolopmentReviewing the return structuresMay suggest quick XBRL adoption for all OSMOS returns

May suggest few new returns for Basel II

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At RBI - Analysis of returnsThrough Standard reports

Fixed formatFrequently usedEasy to generate and use

Through Adhoc reportsUser to choose elements

Downloadable to Excel for further Analysis

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Analysis - A look at Capital AdequacyNeed for capital Acceptable capital standards Initiatives of Basel (BCBS)

Basel I AccordBasel II Accord

Risk assessment under Basel II

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Need for capitalSupports 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

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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.

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Basel I Capital AccordPioneered 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 1996Specified 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

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Basel I to Basel IIWeaknesses of Basel I

One size fits all approachCrude 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

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Basel II AccordExtensive 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 risksProvides 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

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Basel I Vs. Basel II – All Banks CRAR(as of Mar 2009)

 (Amounts in Rs.Cr.) Basel I Basel IITier I Capital 331,494 333,810Tier II Capital 157,143 154,016Total Capital 488,637 487,826  Total RWA 3704,827 3488,303CRAR 13.19 13.98Core CRAR 8.95 9.57

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Basel I Vs. Basel II - Foreign Banks (as of Mar 2009)

 (Amounts in Rs.Cr.) Basel I Basel IITier I Capital 51407 51811

Tier II Capital 9203 9105

Total Capital 60609 60916 

Total RWA 403033 425327

CRAR 15.04 14.32

Core CRAR 12.75 12.18

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Basel I Vs. Basel II – Nationalised Banks

(as of Mar 2009) (Amounts in Rs.Cr.) Basel I Basel II

Tier I Capital 191053 192268Tier II Capital 116692 114063Total Capital 307745 306331 

Total RWA 2498398 2271344CRAR 12.32 13.49Core CRAR 7.65 8.46

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Basel I Vs. Basel II – NPBs(as of Mar 2009)

 (Amounts in Rs.Cr.) Basel I Basel IITier I Capital 72602 73152Tier II Capital 27944 27756Total Capital 100546 100908 

Total RWA 665762 658331CRAR 15.10 15.33Core CRAR 10.91 11.11

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Basel I Vs. Basel II – OPBs(as of Mar 2009)

 (Amounts in Rs.Cr.) Basel I Basel IITier I Capital 16360 16579Tier II Capital 3301 3092Total Capital 19662 19671 

Total RWA 137180 133301CRAR 14.33 14.76Core CRAR 11.93 12.44

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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

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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

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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

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Assessment of Capital Adequacy – Standardised ApproachRisk Assets - on balance sheet – trends

Absolute quantum, Composition, Quality, and Riskiness

Movements in credit, market and operational riskReflects the direction of business strategy and

risk appetiteGrowth in quantum of risk assets to be

compared in relation to total assets and regulatory capital

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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

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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

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Assessment of Capital AdequacyCapital charge for failed transactions

Securities transactionsForeign exchange transactions

Market Risk Exposures Trends in capital charge

Specific risk for securities held in HFT and AFSGeneral market risk for securities held in HFT &

AFS Equity position Foreign exchange and gold position

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Assessment of Capital AdequacyResidual 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

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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

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Thank you !!!