CAPITAL ADEQUACY STANDARDS

Capital Adequacy Standards



Capital Adequacy Standards

For the effective functioning of market players to allow companies other requires stability and confidence. Capital standards require that the confidence building of each individual to the financial community, including insufficient capital. This is the institutions and off-balance sheet risk capital should be sufficient risk to depositors and shareholders of financial institutions to protect. At the top of the list of risks, credit and markets, banks must set aside capital to cover this is not surprising that the two major risks. Capital rules, a company must be designed to ensure that losses will be included in disrepair, the company's customers, the losing party and the regular functioning of financial markets without the liquidation of companies.

Minimum capital standards, is an important tool to reduce systemic risk. They also play a central role in how regulators oversee financial institutions. (You can also view the security system.) But as far as the application of capital requirements, based on sophisticated models of risk tend to simple mechanical rules for 2002, although the steps to change the situation. It can also lead the two main types of financial institutions to distortions of competition between the demands of long-term capital for banks and securities firms, there is a difference.

Basel Committee on Banking Supervision standards for the creation of capital is the domain. 8% minimum capital requirements for banks in the industrialized world, his seminal work, the 1988, assuming that is updated, the Committee for a new framework for running a "capital consultation paper reviews all stakeholders "(1999). 31. March 2000 to a decade the most comprehensive reforms in international banking rules to a document that represents a comment.

The new framework is designed to pave the way regulatory capital reflects the underlying risks for improvement. It consists of three columns. The original requirements, minimum capital, is developed and in 1988 expanded the provisions of reference. Risk weighting system described above is a system that uses external ratings to be replaced. 20% of the debt of an OECD country, a single risk weight of gravity is three times or to continue enjoying the moment. A few companies in corporate bond credit rating so that a single dose of 100%, 20%, the risk weight, the weight slowly you like. He also higher than some poor risk weight of 100% makes risk committee. Asset securitization has to deal with a new plan. For example, securitization of these points to the double-D targets over a period of 150% to 50% of the points of risk weughted. For some sophisticated banks, the Committee on an approach based on internal ratings for the cost of capital is based, to verify compliance with a strict control is required and could be quantitatively and qualitatively.

The current contract specifies the obligations of the credit markets and open capital to trade. The Commission, the risk of the average interest rate risk of banking book interest rate will significantly increase the specific charge of operational risk for the development fee

1988 under the ...