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CS Professional · Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

A bank's risk-weighted assets for credit risk are Rs 600 crore, and for market and operational risk together Rs 150 crore. Its Common Equity Tier 1 is Rs 60 crore and Additional Tier 1 is Rs 15 crore, and Tier 2 capital is Rs 30 crore. What is its total capital adequacy ratio and does it meet the 9 percent minimum capital requirement under Basel III as applied by RBI?

The capital adequacy ratio is 14 percent, which meets the 9 percent minimum. Total capital is Rs 105 crore (CET1, AT1 and Tier 2) divided by total risk-weighted assets of Rs 750 crore covering credit, market and operational risk. Omitting Tier 2 would understate the ratio.

  1. A14 percent; meets the minimumCorrect
  2. B12 percent; meets the minimum
  3. C10 percent; meets the minimum
  4. D8.5 percent; does not meet the minimum

Explanation

Total capital = 60 + 15 + 30 = Rs 105 crore. Total RWA = 600 + 150 = Rs 750 crore. Ratio = 105/750 = 14 percent, above 9 percent. Using only credit RWA gives 17.5 percent, and using only Tier 1 over total RWA gives 10 percent, both wrong.

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