9 2 The development of the BIS II ratio According to pillar I of the New

9 2 the development of the bis ii ratio according to

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2 The development of the BIS II-ratio According to pillar I of the New Capital Accord Basel II, banks must satisfy certain criteria to calculate the regulatory capital. Banks must have a certain level of solvency. The solvency is an indicator of the degree in which a bank can satisfy its financial obligations. The higher the solvency, the better a bank can meet its financial obligations. The solvency is expressed in percentages. A calculation of this percentage is written in the New Basle Accord, This will be referred as the BIS II – ratio. The BIS II –ratio indicates the altitude of the banks reserved capital to cover all risks (credit, market and operational risks) in a percentage. A detailed description of this ratio will be described in paragraph 2.1. 2.1 The BIS II ratio The BIS II- ratio is calculated with formula 1. In the numerator, one can see tier 1, tier 2 and tier 3 capitals. In the denominator one can see several components, which represents the reserved capital. BIS II - ratio = or mr C C RWA Tier Tier Tier 5 . 12 5 . 12 3 2 1 (1) The components, which are included in the BIS II – ratio are generally described as following: RWA= Risk Weighted Assets. These are the added up assets, weighed with the associated risk percentage. The RWA are stipulated at calculating the capital seizure for credit risk. Tier1 = A term used to describe the capital adequacy of a bank. Tier I capital is core capital; this includes equity capital and disclosed reserves. Tier2 = A term used to describe the capital adequacy of a bank. Tier II capital is secondary bank capital that includes items such as undisclosed reserves, general loss reserves, subordinated debt of five years. Tier3= A term used to describe the capital adequacy of a bank. This is the subordinated term debt of a maximum of two years. C mr = Capital requirements for market risk. C or = Capital requirements for operational risk. 2.2 The BIS I (1988) - ratio The BIS II -ratio was developed from the BIS ratio. This ratio was firstly introduced in the Basle Accord in 1988, this will be referred as the BIS I (1988) –ratio. Initially this ratio only took credit risk into account. The requirements were that the capital seizure had to be at least 8% of the risk weight asset. To calculate the risk weight asset, banks multiply several assets with the associated risk percentages, which are prescribed by the Basel committee. The capital seizures are to be covered by the tier 1 and tier 2 capitals. The BIS I (1988) – ratio is calculated wit formula 2: BIS I (1988) - ratio = RWA Tier Tier 2 1 (2) 10
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The description of the elements which are included by the “BIS I (1988) – ratio” is written in paragraph 2.1. Note that formula 2 does not take credit risk into account. This element was taken into the ratio in 1996.
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