Chap 21 - Banking Regulation
and Capital
·
Systemic risk is the risk
that a default by one financial institution will create a 'ripple effect' that
leads to defaults by other financial instihations and threatens the stability
of the financial system.
·
In calculating the Cooke
ratio both on-balance-sheet and off-balance-sheet items are considered. They
are used to calculate bank's total risk-weighted assets. It is a measure of the
bank's total credit exposure. 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.
