...Accounting Standards. 1. Generally Accepted Accounting Principles (GAAP) In the U.S., Generally Accepted Accounting Principles are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and governments. The term is usually confined to the United States; hence it is commonly abbreviated as US GAAP or simply GAAP. However, in the theoretical sense, Generally Accepted Accounting Principles encompass the entire industry of accounting, and not only the United States. Outside the academic context, GAAP means US GAAP. Similar too many other countries practicing under the common law system, the United States government does not directly set accounting standards, in the belief that the private sector has better knowledge and resources. US GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC) require that it be followed in financial reporting by publicly traded companies. Currently, the Financial Accounting Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles for public and private companies, as well as non-profit entities. For local and state governments, GAAP is determined by the Governmental Accounting Standards Board (GASB), which operates under a set of assumptions, principles, and constraints, different from those of...
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...Basel I DEFINITION OF 'BASEL I' A set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets. Basel II is the second of the Basel Accords, (now extended and partially superseded[clarification needed] by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. BREAKING DOWN 'Basel I' The first accord was the Basel I. It was issued in 1988 and focused mainly on credit risk by creating a bank asset classification system. This classification system grouped a bank's assets into five risk categories: 0% - cash, central bank and government debt and any OECD government debt 0%, 10%, 20% or 50% - public sector debt 20% - development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (under one year maturity) and non-OECD public sector debt, cash in collection 50% - residential mortgages 100% - private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and equipment, capital instruments issued at other banks The bank must maintain capital (Tier 1 and Tier 2) equal to at least 8% of its risk-weighted assets. For example, if a bank has risk-weighted assets of $100 million, it is required to maintain...
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...Unlike Basel I and Basel II, which focus primarily on the level of bank loss reserves that banks are required to hold, Basel III focuses primarily on the risk of a run on the bank by requiring differing levels of reserves for different forms of bank deposits and other borrowings. Therefore Basel III rules do not, for the most part, supersede the guidelines known as Basel I and Basel II; rather, it will work alongside them. Key principles[edit] Capital requirements[edit] The original Basel III rule from 2010 was supposed to require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (including common equity and up from 4% in Basel II) of "risk-weighted assets" (RWAs).[3] Basel III introduced two additional "capital buffers"—a "mandatory capital conservation buffer" of 2.5% and a "discretionary counter-cyclical buffer" to allow national regulators to require up to an additional 2.5% of capital during periods of high credit growth. Leverage ratio[edit] Basel III introduced a minimum "leverage ratio". The leverage ratio was calculated by dividing Tier 1 capital by the bank's average total consolidated assets (not risk weighted);[4][5] The banks were expected to maintain a leverage ratio in excess of 3% under Basel III. In July 2013, the U.S. Federal Reserve announced that the minimum Basel III leverage ratio would be 6% for 8 Systemically important financial institution (SIFI) banks and 5% for their insured bank holding companies.[6] Liquidity...
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... Marylebone Bank is currently holdings investments in five FTSE companies in banking industry, also holdings certain assets of cash and equity. The report sets the bank’s capital requirement with the requirement of Basel Accords in order to build up sustainable positive capital frequently to avoid losses, liabilities and liquidity. Firstly, the report analyzes the risk management under current assets of Marylebone by applying the VaR methods, such as Variance – Covariance, Historical Simulation and Extended Historical Simulation, in order to have criticisms under each method on the effectiveness. The reports will continuously measure and manage each category under Basel Accords regulation: Market Risk, Credit Risk and Operational Risk. Furthermore, all five Basel Accords including: Basel 1(1988 BIS Accord), Basel 1 (1996 Amendment), Basel 2, Basel 2.5 and Basel 3 will be taken into account in order to develop the framework in details. Finally, the report concludes with the core concept of capital, the influences of risk management and capital requirement under the banking regulation using example of the most recent Global Recession. TABLE OF CONTENT I. Introduction 4 II. Market Risk Capital Charge Estimation 4 1. Variance - Covariance Method 4 2. Historical Simulation Method 5 III. Credit Risk and Operational Risk Estimation under different Basel Accords 6 3. Under Basel 1 (1988 BIS Accord) 6 1.1 On-balance-sheet calculation 7 ...
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...CAPITAL ADEQUACY FRAMEWORK AND RISK MANAGEMENT IN BANKS GUEST LECTURE: MR. R M PATTANAIK EX GM- INDIAN OVERSEAS BANK CAPITAL ADEQUACY RATIO (CAR) Also known as Capital to Risk (Weighted) Assets Ratio (CRAR) is the ratio of a bank’s capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory capital requirements. It is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. CAR= Capital funds/ Total risk weighted assets (TRWA) WHAT IS RISK? Risk is the possibility of suffering a loss which is UNEXPECTED, UNFORSEEN and UNCERTAIN. Expected losses can be managed and covered by “Provisions” like Loan loss or NPA provisions, Provision for depreciation and investments etc. However, unexpected losses can be taken care by maintaining adequate capital. The capital acts as cushion or shock absorber for the bank in times of unforeseen losses. RISK MANAGEMENT Whatever activities you undertake there is a certain degree of risk associated with it. This risk however...
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...END TERM PROJECT COMMERCIAL BANK MANAGEMENT TOPIC 5 BANK CAPITAL MANAGEMENT- CAPITAL ADEQUACY FRAMEWORK Submitted to: Submitted by: Group 5 Prof. D.N. Panigrahi Abhishek Singh (2014013) Anisha jain (2014042) Bakul Malik (2014072) Gurusha Godwani (2014100) Ketki Chaturvedi (2014133) CHAPTER 1 BANK CAPITAL MANAGEMENT- CAPITAL ADEQUACY FRAMEWORK INTRODUCTION Bank capital is often defined in tiers or categories that include shareholders' equity, retained earnings, reserves, hybrid capital instruments, and subordinated term debt. Capital ratios are commonly measured as a percent of bank assets or risk-weighted bank assets. Bank capital serves as an important cushion against unexpected losses. It creates a strong incentive to manage a bank in a prudent manner, because the bank owners’ equity is at risk in the event of a failure. Thus, bank capital plays a critical role in the safety and soundness of individual banks and the banking system. Role of bank capital: • Source of funds – Start-up costs – Growth or expansion (mergers and acquisitions) – Modernization costs • Cushion to absorb unexpected operating losses – Insufficient capital to absorb losses will cause insolvency – Long-term debt can only absorb losses in the event of institution failure • Adequate capital – Regulatory requirements to promote bank safety and soundness – Mitigate moral hazard problems of deposit insurance by increasing shareholders’ exposure to bank...
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...The Basel II was proposed in 1999 as a more comprehensive capital adequacy accord, formally known as A Revised Framework on International Convergence of Capital Measurement and Capital Standards, and informally as “Basel II”. Each Pillar of Basil I was expanded to cover new approaches. A. Pillar I Known as Minimum Capital Requirements, Basel II creates a more sensitive measurement of a bank’s risk-weighted assets. It broadens the scope of regulation to include assets of the holding company of an internationally active bank to avoid the risk that a bank will “hide” risk-taking by transferring its assets to other subsidiaries. Basel II proposes three mutually exclusive methods. The first method, known as the Basic Indicator Approach, recommends that banks hold capital equal to fifteen percent of the average gross income earned by a bank in the past three years. Regulators are allowed to adjust the 15% number according to their risk assessment of each bank. The second method, known as the Standardized Approach, divides a bank by its business lines to determine the amount of cash it must have on hand to protect itself against operational risk. Each line is weighted by its relative size within the company to create the percentage of assets the bank must hold. The third method, the Advanced Measurement Approach is much more demanding for regulators and banks alike: it allows banks to develop their own reserve calculations for operational risks. Regulators, of course, must approve...
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...international. Marylebone Bank is currently holdings investments in five FTSE companies in banking industry, also holdings certain assets of cash and equity. The report sets the bank’s capital requirement with the requirement of Basel Accords in order to build up sustainable positive capital frequently to avoid losses, liabilities and liquidity. Firstly, the report analyzes the risk management under current assets of Marylebone by applying the VaR methods, such as Variance – Covariance, Historical Simulation and Extended Historical Simulation, in order to have criticisms under each method on the effectiveness. The reports will continuously measure and manage each category under Basel Accords regulation: Market Risk, Credit Risk and Operational Risk. Furthermore, all five Basel Accords including: Basel 1(1988 BIS Accord), Basel 1 (1996 Amendment), Basel 2, Basel 2.5 and Basel 3 will be taken into account in order to develop the framework in details. Finally, the report concludes with the core concept of capital, the influences of risk management and capital requirement under the banking regulation using example of the most recent Global Recession. TABLE OF CONTENT I. Introduction 4 II. Market Risk Capital Charge Estimation 4 1. Variance - Covariance Method 4 2. Historical Simulation Method 5 III. Credit Risk and Operational Risk Estimation under different Basel Accords 6 3. Under Basel 1 (1988 BIS Accord) 6 1.1 On-balance-sheet calculation 7 ...
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...the risk of default and that they have enough capital to sustain operating losses while still honoring withdrawals. Also known as "regulatory capital". A vital element of the work of any industry regulator is to ensure that the firms operating in the industry are prudently managed. The aim is to protect the firms themselves, their customers and the economy, by establishing rules and principles that should ensure the continuation of a safe and efficient market, able to withstand any foreseeable problems. The Basel Accords, published by the Basel Committee on Banking Supervision housed at the Bank for International Settlements, sets a framework on how banks and depository institutions must calculate their capital. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as Basel I. This framework has been replaced by a significantly more complex capital adequacy framework commonly known as Basel II. After 2012 it will be replaced by Basel III.[2] Another term commonly used in the context of the frameworks is Economic Capital, which can be thought of as the capital level bank shareholders would choose in absence of capital regulation. For a detailed study on the differences between these two definitions of capital, refer to.[3] The capital ratio is the percentage of a bank's capital to its risk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is dictated under the...
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...CHAPTER I: INTRODUCTION 1. THEME OF THE STUDY Risk management underscores the fact that the survival of an organization depends heavily on its capabilities to anticipate and prepare for the change rather than just waiting for the change and react to it. The objective of risk management is not to prohibit or prevent risk taking activity, but to ensure that the risks are consciously taken with full knowledge, purpose and clear understanding so that it can be measured and mitigated. It also prevents an institution from suffering unacceptable loss causing an institution to suffer or materially damage its competitive position. Functions of risk management should actually be bank specific dictated by the size and quality of balance sheet, complexity of functions, technical/ professional manpower and the status of MIS in place in that bank. 1.2 INTRODUCTION Risk: the meaning of ‘Risk’ as per Webster’s comprehensive dictionary is “a chance of encountering harm or loss, hazard, danger” or “to expose to a chance of injury or loss”. Thus, something that has potential to cause harm or loss to one or more planned objectives is called Risk. The word risk is derived from an Italian word “Risicare” which means “To Dare”. It is an expression of danger of an adverse deviation in the actual result from any expected result. Banks for International Settlement (BIS) has defined it as- “Risk is the threat that an event or action will adversely affect an organization’s ability...
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...CHAPTER I: INTRODUCTION 1. THEME OF THE STUDY Risk management underscores the fact that the survival of an organization depends heavily on its capabilities to anticipate and prepare for the change rather than just waiting for the change and react to it. The objective of risk management is not to prohibit or prevent risk taking activity, but to ensure that the risks are consciously taken with full knowledge, purpose and clear understanding so that it can be measured and mitigated. It also prevents an institution from suffering unacceptable loss causing an institution to suffer or materially damage its competitive position. Functions of risk management should actually be bank specific dictated by the size and quality of balance sheet, complexity of functions, technical/ professional manpower and the status of MIS in place in that bank. 1.2 INTRODUCTION Risk: the meaning of ‘Risk’ as per Webster’s comprehensive dictionary is “a chance of encountering harm or loss, hazard, danger” or “to expose to a chance of injury or loss”. Thus, something that has potential to cause harm or loss to one or more planned objectives is called Risk. The word risk is derived from an Italian word “Risicare” which means “To Dare”. It is an expression of danger of an adverse deviation in the actual result from any expected result. Banks for International Settlement (BIS) has defined it as- “Risk is the threat that an event or action will adversely affect an organization’s ability...
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...TITLE OF PAPER NOT DECIDED Stephen Dyer Special Studies: Economics 4950 Spring 2012 Hull College of Business at Augusta State University I. Introduction II. Overview of the World Financial Map a. International Monetary Fund (IMF) i. The World Bank (TWB) b. Bank for International Settlements (BIS) i. Committee on Global Financial System (CGFS) ii. Financial Stability Institute (FSI) c. Basel Committee on Banking Supervision (BCBS) d. Financial Stability Board (FSB) III. 2008 and 2011 World Financial Crises a. The United States of America – 2008 b. The European Union – 2011 IV. Proposed Solutions and Potential Problems V. References I. Introduction In 2008 the world started to suffer a financial crisis. Originating in the United States it quickly spread, affecting the European Continent first then the rest of the world. This paper will asses the situation on a global spectrum, covering a brief history, and follow up with proposal(s) for avoiding the same, or worse crisis in the future. Current solutions to the problem include greater regulation of the financial sector, nationalization of the banking industry in countries where they currently are private, and possibly another institution in which laws are evaluated by an “Economic Supreme Court” with veto power over legislation (Colignatus, 2009) Section II will give the background of the pre- and post-crisis global financial system, Section III will...
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...Accountants of India - Batch 129 Basel II Implications on Indian Banks Group Members Rahul Sharma (ERO0097549) Abhishek Tulsyan (CRO0137558) Sikha Kedia (ERO0105399) Gourav Modi (ERO0016925) Praveen Didwania (ERO0110131) Index of Contents Topics Page No. I. Introduction A. B. C. D. E. F. G. Background Functions of Basel Committee The Evolution to Basel II – First Basel Accord Capital Requirements and Capital Calculation under Basel I Criticisms of Basel I New Approach to Risk Based Capital Structure of Basel II First Pillar : Minimum Capital Requirement Types of Risks under Pillar I The Second Pillar : Supervisory Review Process The Third Pillar : Market Discipline 3 3 3 3 3 4 4 II. The Three Pillar Approach A. B. C. D. 5 5 6 6 7 7 7 III. Capital Arbitrage and Core Effect of Basel II A. Capital Arbitrage B. Bank Loan Rating under Basel II Capital Adequacy Framework C. Effect of Basel II on Bank Loan Rating IV. Basel II in India A. Implementation C. Impact on Indian Banks D. Impact on Various Elements of Investment Portfolio of Banks E. Impact on Bad Debts and NPA’s of Indian Banks D. Government Policy on Foreign Investment E. Threat of Foreign Takeover 8 8 9 10 10 10 V. Conclusion A. SWOT Analysis of Basel II in Indian Banking Context B. Challenges going ahead under Basel II 11 11 13 13 VI. VII. References The Technical Paper Presentation Team 2 I. Introduction: A. Background Basel II is a new capital adequacy framework...
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...THE BASEL CAPITAL ACCORDS BY JOE LARSON APRIL 2011 I. Introduction Banks are a vital part of a nation’s economy. In their traditional role as financial intermediaries, banks serve to meet the demand of those who need funding. As such, banks make it possible for people to buy homes and for businesses to expand. Banks therefore facilitate spending and investment, which fuel growth in the economy. However, despite their important role in the economy, banks are nevertheless susceptible to failure. Banks, like any other business, can go bankrupt. However, unlike most other businesses, the failure of banks, especially very large ones, can have far-reaching implications. As we saw during the Great Depression and, most recently, during the global financial crisis and the ensuing recession, the health of the bank system (or lack thereof) can trigger economic calamities affecting millions of people. Consequently, it is imperative that banks operate in a safe and sound manner to avoid failure. One way to ensure this is for governments to provide diligent regulation of banks. Yet, with the advent of globalization, banking activities are no longer confined to the borders of any individual country. With cross-border banking activities rapidly increasing, the need for international cooperation in bank regulation has likewise increased. Ready to meet this need is the Basel Committee on Bank Supervision (BCBS). In its role as the international advisory authority on bank regulation, the BCBS...
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...Capital Adequacy of Social Islami Bank Limited By Abdur Rahman Shible ID: 0720529 An Internship Report Presented in Partial Fulfilment of the Requirement for the Degree Bachelor of Business Administration (BBA) INDEPENDENT UNIVERSITY, BANGLADESH September 2012 Social Islami Bank Limited Page 1 Capital Adequacy of Social Islami Bank Limited By Abdur Rahman Shible ID: 0720529 Has Been Approved September 2012 ______________________ Mr. Abdullah Al Aabed Lecturer School of Business Independent University, Bangladesh. September 6, 2012 Social Islami Bank Limited Page 2 LETTER OF TRANSMITTAL Date: 6th September, 2012 Mr. Abdullah Al Aabed Lecturer School Of Business Independent University, Bangladesh Subject: Submission of Internship Report Dear Sir, I am hereby submitting my Internship Report, which is a part of the BBA Program curriculum. It is a great achievement to work under your active supervision. This advance working report is based on Capital adequacy of Social Islami bank Limited. I have got the opportunity to work in Social Islami Bank Limited for twelve weeks, under the supervision of Mr. Fazle Rabbi Talukder (Assistant Officer). This project gave me both academic and practical exposures. First of all I learned about the organizational culture of a prominent bank of the country. Secondly, the project gave me the opportunity to develop a network with the corporate environment. I shall be highly obliged if you are kind enough to receive this report and provide...
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