We know that in order for banks to be profitable and also earn from their assets, banks give out loans to borrowers in the form of loans. Since, the 2008 sub-prime crisis, it was mandatory to hold capital against risky assets.
So, banks were required to keep Capital in excess of risk-weighted assets (RWA) by 8%. Simply, put Capital Adequacy Ratio= Capital/RWA >= 8%
The minimum capital requirements are based on Basel II Accord
*Minimum Capital Requirements
*Supervisory Review
*Market Discipline
Our focus today is specifically on Minimum Capital requirements, and it consists of the following components:
*Credit Risk
*Operational Risk
*Market Risk
Since we are focusing on Credit Risk, let’s talk more about it. There are two approaches:
- Standardized Approach (SA)
- Internal Ratings Based (IRB) Approaches
The IRB approach has in turn two components:
- Foundation Internal Ratings Based (F-IRB) Approach
- Advanced Internal Ratings Based (A-IRB) Approach
Now, I’ll let you let that sink in, and we will connect again to discuss more on this.
Stay tuned, learners, we got this! ❤ ❤
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