What are prudential filters?
Prudential filters address an impact on capital that has been considered as undesirable from a prudential perspective, for example, a capital increase from unrealised gains or from a lower value of its own debt when a bank’s credit quality declines.
What is included in regulatory capital?
A capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets.
What are the components of Tier 2 capital under Basel 3 guidelines?
This tier is comprised of revaluation reserves, general provisions, subordinated term debt, and hybrid capital instruments.
How do you calculate total regulatory capital?
For banks and insurers, the amount of regulatory capital (the capital base) is calculated in a similar manner, by adding the equity capital paid in by shareholders with retained earnings and certain other instruments that are available to absorb unexpected losses.
When were Basel 3 guidelines published?
A consortium of central banks from 28 countries published Basil III in 2009, largely in response to the credit crisis resulting from the 2008 economic recession.
How do banks calculate regulatory capital ratios?
It is calculated by dividing Tier-1 capital by a bank’s average total consolidated assets and certain off-balance sheet exposures. The higher the tier-1 leverage ratio is, the more likely a bank can withstand negative shocks to its balance sheet.
What is the difference between economic capital and regulatory capital?
Economic capital (EC) refers to the amount of risk capital that a bank estimates it will need in order to remain solvent at a given confidence level and time horizon. Regulatory capital (RC), on the other hand, reflects the amount of capital that a bank needs, given regulatory guidance and rules.
