022313 capitaladequacyframework 54 guidelines for the

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Unformatted text preview: category; vi) exclude income from legal settlements in favour of the bank; vii) exclude other extraordinary or irregular items of income and expenditure; and viii) exclude income derived from insurance activities (i.e. income derived by writing insurance policies) and insurance claims in favour of the bank. 02/23/13 Capital Adequacy Framework 50 The Basic Indicator Approach The Banks are advised to compute capital charge for operational risk under the Basic Indicator Approach as follows: a) Average of [Gross Income * alpha] for each of the last three financial years, excluding years of negative or zero gross income b) Gross income = Net profit (+) Provisions & contingencies (+) operating expenses (Schedule 16) (–) items (iii) to (viii) of previous slide. c) Alpha = 15 per cent 02/23/13 Capital Adequacy Framework 51 Operational Risk Operational Standardised Approach­ Capital charge is calculated as a simple summation of capital charges across 8 business lines Business lines Corporate finance 18 Trading & sales 18 Retail Banking 12 Commercial Banking 15 Payment & Settlement 18 Agency Services 15 Asset Management 12 Retail Brokerage 02/23/13 % of gross income 12 Capital Adequacy Framework 52 Pillar 2: Supervisory Review and Evaluation Process (SREP) Evaluation The objective of the SRP is to ensure that banks have adequate capital to support all the risks in their business as also to encourage them to develop and use better risk management techniques for monitoring and managing their risks. Banks were required to have a Board­approved policy on ICAAP and to asses the capital requirement as per Internal Capital Adequacy Assessment Process (ICAAP). The main aspects to be addressed under the SRP, and therefore, under the ICAAP, would include: (a) the risks that are not fully captured by the minimum capital ratio prescribed under Pillar 1; (b) the risks that are not at all taken into account by the Pillar 1; and © the factors external to the bank. 02/23/13 Capital Adequacy Framework 53 Supervisory Review and Evaluation Process (SREP) (SREP) Some of the risks that the banks are generally exposed to but which are not captured or not fully captured in the regulatory CRAR would include: (a) Interest rate risk in the banking book; (b) Credit concentration risk; (c) Liquidity risk; (d) Settlement risk; (e) Reputational risk; (f) Strategic risk; (g) Risk of under­estimation of credit risk under the standardised approach; (h) “Model risk” i.e., the risk of under­estimation of credit risk under the IRB approaches; (i) Risk of weakness in the credit­risk mitigants; (j) Residual risk of securitisation, etc. It is, therefore, only appropriate that the banks make their own assessment of their various risk exposures, through a well­defined internal process, and maintain an adequate capital cushion for such risks. 02/23/13 Capital Adequacy Framework 54 Guidelines for the SREP of the RBI and the ICAAP of banks ICAAP The Background While the Basel ­ I framework was confined to the prescription of only minimum capital requirements for banks, the Basel II framework expands this approach not only to capture certain ad...
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This note was uploaded on 02/23/2013 for the course BANKING 101 taught by Professor Mehta during the Spring '13 term at Albany State University.

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