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Systemic risk is the risk that a default by one financial institution will create a 'ripple effect' that leads to defaults by other financial instigations and threatens the stability of the financial system.
CRAR = Capital/Risk Weighted Assets.
Tier-I capital consists mainly of share capital and disclosed reserves and it is a bank's highest quality capital because it is fully available to cover losses.
Tier-II capital on the other hand consists of certain reserves and certain types of subordinated debt. The loss absorption capacity of Tier-II capital is lower than that of Tier-I capital.
The elements of Tier-I capital include Paid-up capital (ordinary shares), statutory reserves, and other disclosed free reserves.
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The Revised Basel Framework consists of three-mutually reinforcing pillars, viz., minimum capital requirements, supervisory review of capital adequacy, and market discipline.
The options available for computing capital for credit risk are Standardised Approach, Foundation Internal Rating Based Approach and Advanced Internal Rating Based Approach.
The options available for computing Market risk is standardized approach (based on maturity ladder and duration baSed) and advanced approach, i.e., internal models such as VAR
The options available for computing capital for operational risk are Basic Indicator Approach, Standardised Approach and Advanced Measurement Approach.
All commercial banks in India shall adopt Standardised Approach (SA) for credit risk and Basic Indicator Approach (BIA) for operational risk. Banks shall continue to apply the Standardised Duration Approach (SDA) for computing capital requirement for market risks.
The term capital would include
Tier-I or core capital consists of paid up capital, free reserves and unallocated surpluses, less specified deductions.
Tier-II or supplemental capital comprises subordinated debt of more than five years' maturity, loan loss reserves, revaluation reserves, investment fluctuation reserves, and limited life preference shares. Tier-II capital is restricted to 100% of Tier-I capital as before and long-term subordinated debt may not exceed 50% of Tier-I capital.
Tier-III capital will be limited to 250% of a bank's Tier-1 capital that is required to support market risk. This means that a minimum of about 28.5% of market risk needs to be supported by Tier-I capital. Any capital requirement arising in respect of credit and counter-party risk needs to be met by Tier-I and Tier-II capital.
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