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Comprehensive Guide to Capital Management and Profit Planning in Banking Industry

Explore the intricacies of Basel II regulations and capital requirements for credit, market, and operational risks in banks. Learn about capital structures, reserves, asset classification, and provisioning rules. Gain insights into the three pillars of banking supervision.

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Comprehensive Guide to Capital Management and Profit Planning in Banking Industry

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  1. Capital Management &Profit Planning

  2. Basel II Tier I-Core Capital Paid up capital ,Free Reserves and unallocated surpluses Tier II-Supplementary Capital Subordinated debt of more than 5 years maturity ,loan loss reserve, revaluation reserve,investment fluctuation reserve,limited life preference share-restricted to 100% of tier I capital Tier III Capital subordinated debt with shot term maturity [min 2 years] for market risk

  3. Total Risk weighted Assets • Risk weighted assets of credit risk plus • 12.5* Capital requirement for market risk plus • 12.5* capital requirement for for operational risk

  4. Three pillars • First Pillar-minimum capital requirements • Second pillar-supervisory process • Third pillar-market discipline

  5. Standardized Approach Internal rating based approach [1]Foundation Approach [2]Advanced IRB Approach Capital Charge for Credit Risk

  6. Capital Charge for Operational Risk • The Basic Indicator Approach • The Standardized Approach • Advanced Management Approach

  7. Standardized Approach for Operational Risk • Beta factor- a fixed percentage set by Basel committee • Maximum 18% • Minimum 12% • Banks activities are divided into 8 business lines-corporate finance,trading,retail banking, commercial banking, payment &settlement, agency services, asset management, retail brokering

  8. Asset Classification • Standard Assets • Sub Standard Assets • Doubtful Assts • Loss Assets

  9. Provisioning • Standard Assts 0.40% • Substandard- • Secured -provision 10% • Unsecured[realisable value is not more than 10% of o/s] –provision 20%

  10. Provision Doubtful I- first 12 months Provision 20% realizable value of security plus 100% shortfall of security Doubtful II-further 24 months Provision 30% realizable value of security plus 100% shortfall of security Doubtful III-for over 36 months 100% provision Loss Assets 100%

  11. Thank you ravindran@iibf.org.in

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