Welcome to the Presentation

on
CAPITAL ADEQUACY

Presented by-
Md. Abdul Khaleque
Deputy General Manager
Central Accounts Division-1
Sonali Bank Limited
Head Office, Dhaka.
 Introduction
• Capital Adequacy is the amount of capital that a bank
or other financial institution has to maintain as per the
requirement of its regulator.
• This is usually known as a capital adequacy ratio (CAR)
of equity. CAR must be maintained as a percentage of
risk-weighted assets . Now a days it is known as capital-
to-risk weighted assets ratio (CRAR).
CRAR= Total Eligible Capital/(Credit RWA + Market RWA + Operational RWA)

• The purpose of Capital adequacy is to protect the

depositors and promote the stability and efficiency of
financial systems around the world.
 Capital Adequacy and BASEL Committee
The main international effort to establish rules around capital
adequacy has been the Basel Accords, published by the Basel
Committee on Banking Supervision (BCBS) housed at the Bank for
International Settlements (BIS). Basel is a city of Switzerland where
the Bank of International Settlement (BIS) is situated. After the
name of the city Basel, the supervision rules and regulations set by
BIS is called Basel standards in short it is termed as Basel.
This sets a framework on how banks and depository institutions
must calculate their capital. After obtaining the capital ratios, the
bank capital adequacy can be assessed and regulated.
In 1988, the Committee decided to introduce a capital
measurement system commonly referred to as Basel I. In June 2004
this framework was replaced by a significantly more complex
capital adequacy framework commonly known as Basel II.
Following the financial crisis of 2007–08, Basel II was replaced by
Basel III which will be gradually phased in between 2013 and 2019.
 Policy on Capital Adequacy of Bank
• To adopt the international best practices , to make the
bank’s capital more risk-absorbent as well as to build the
banking industry more shock resistant and stable, all
scheduled banks are obligated to comply with “Guidelines
on Risk Based Capital Adequacy (RBCA) for Banks”.

• Prior to calculate capital adequacy for any bank, it is

mandatory to compute bank’s following current two very
important categories which can be done through the
BASEL guideline:
1. Total Eligible Capital and
2. Total Risk-Weighted Assets (RWA)
 Computation of Eligible Capital

In terms of Section 13 of the Bank Company Act, 1991

(Amended upto 2013), the terms and conditions of the
main features of all capital instruments have been
segregated in terms of the eligibility criteria set forth vide
BRPD Circular No. 18 dated 21 December 2014 [Guidelines
on Risk Based Capital Adequacy (Revised Regulatory Capital
Framework for Banks in line with Basel III)] and other
relevant instructions given by Bangladesh Bank from time
to time. The main features of the capital instruments are as
next slides:
 Computation of Eligible Capital (Cont…)
Components of Capital
Tier 1 (Going Concern) Capital: Tier 2 (Gone Concern) Capital:
1) Common Equity Tier 1 (CET 1) Capital:
• Paid up Capital
• General Provision
• Share Premium
• All other preference shares
• Statutory Reserve
• General Reserve • Subordinate debt
• Retained Earnings • Minority Interest
• Minority Interest in subordinates • HO borrowings in foreign currency
• Dividend Equalization reserve received that meet the criteria of
• Actuarial gain Tier 2 debt capital.
• Interest free funds from HO • Revaluation Reserve
• Others (if any item approved by • Other (if any item approved by
Bangladesh Bank)
Bangladesh Bank)
2) Additional Tier-1 (AT-1) Capital:
• Noncumulative irredeemable preference
shares.
• Instruments issued by the Bank that meet
the qualifying criteria for AT-1
• Minority interest
• HO borrowings in foreign currency by
foreign Banks.
 Phase-in Arrangement
2015 2016 2017 2018 2019
Minimum Common Equity Tier 1 (CET1)
4.50% 4.50% 4.50% 4.50% 4.50%
Capital Ratio
Capital Conservation Buffer (CB) - 0.625% 1.25% 1.875% 2.50%
Minimum CET 1 + CB 4.50% 5.125% 5.75% 6.375% 7.00%
Minimum T-1 Capital Ratio 5.50% 5.50% 6.00% 6.00% 6.00%
Minimum Total Capital Ratio 10.00% 10.00% 10.00% 10.00% 10.00%
Minimum Total Capital + CB 10.00% 10.625% 11.25% 11.875% 12.50%
Phase-in of deduction from CET1
Excess Investment over 10% of bank’s equity 20% 40% 60% 80% 100%
Phase-in of deduction from CET1
RR from Fixed Assets, Securities & Equity 20% 40% 60% 80% 100%
3%
Leverage Ratio (LR) 3% 3% Migration to Pillar 1
Readjust
>=100%
Liquidity Coverage Ratio (LCR) >=100% >=100% >=100% >=100%
From sept
>=100%
Net Stable Funding Ratio (NSFR) >=100% >=100% >=100% >=100%
From sept
 Action Plan BASEL-III Implementation

Action Deadline
Issuance of Guidelines on Risk
December 2014
Based Capital Adequacy
Commencement of Basel III
January 2015
Implementation process
Capacity Building of bank and
January 2015- December 2019
BB officials
Initiation of Full Implementation
January 2020
of Basel III
 Computation of SBL’s Eligible Capital
Figure in crore and SBL maintained as of 30 June 2016
Common Equity Tier1 Capital Tier-2 Capital
(Going Concern Capital) (Gone Concern Capital):
Paid up Capital 3830.00 General provision against
Statutory Reserve 760.15 unclassified loans and off- 577.70
General Reserve 10.67 balance sheet exposures
Retained Earnings (2412.18) Revaluation Reserves as on
2188.64 (50% of Fixed Assets and 1300.83
Additional Tier 1 (AT1) capital: Securities & 10% of Equities)

N/A Others (if any item approved

130.07
by Bangladesh Bank)
Figure in crore
A. Total Tier1 Capital = 2188.64 B. Total Tier 2 Capital = 2008.60
Adjustments/Deductions from CET 1 capital (Prov+DT) 822.55
Revaluation Reserves for Fixed Assets, Securities (20% for the year 520.33
2015) from Tier 2 capital
C. Total deduction required as of 30 June 2016 1342.88
Total Eligible Capital (A+B-C) 2854.36
 Computation of Risk Weighted Assets (RWA)
Basel Accords deals with recommendation on banking
regulations in regards to capital risk, market risk and operational
risk. However, in terms of the regulatory guidelines, the Bank
computes the capital charge / requirement as under:
i. Credit risk : On the basis of Standardized Approach;
ii. Market risk : On the basis of Standardized Approach; and
iii. Operational risk: On the basis of Basic Indicator Approach.
Therefore Total RWA= Credit RWA+ Market RWA+ Operational RWA
As of 30 June 2016 SBL’s total RWA was Tk. 43,750 crore.
Sonali Bank Limited is very much aware of maintaining
Capital to support its current and future activities in view to
this objective. Five year capital growth plan up to 2019 was
prepared for this purpose.
 SBL’s Status on RWA Ratio as of June 2016
Figure in crore

Items Solo Consolidated

Capital Requirement for Credit Risk 34,242.83 34,521.19
Capital Requirement for Market Risk 5,449.66 5,519.56
Capital Requirement for Operational Risk 4,057.99 4,095.83
Capital to Risk Weighted Assets Ratio (CRAR) 6.52% 6.39%
Common Equity Tier-1 to RWA Ratio 3.12% 3.02%
Tier-1 Capital to RWA Ratio 3.12% 3.02%
Tier-2 Capital to RWA Ratio 3.40% 3.37%
Capital Conservation Buffer ------------------ ------------------
Available Capital under Pillar 2 Requirement
 Capital Adequacy Status of SBL
as of 30 June 2016

• Shortage of CRAR (6.52% in place of 10%)

• Deduction of Deferred Tax Assets (Tk.365.76 Crore

instead of Tk.2,438.38 Crore)

• Shortfall in Provision
- against NPLs: 373.79 crore
- against Investment in shares: 83 crore
• Bank fails to meet-up Capital Conservation Buffer
• Others
 Leverage Ratio
• In order to avoid building-up excessive on & off balance sheet leverage a
simple & transparent leverage ratio has been introduced in BASEL-III.

Leverage Ratio = (Tier 1 Capital)/(Total Exposure)

A Minimum Tier 1 leverage ratio of 3% is being prescribed both at SOLO &

Consolidated level.
As of June 2016 SBL has Shortage of Leverage Ratio (1.21% in place of 3%)

Stock of high quality liquid assets

LCR= >= 100%
Total net cash outflow over the next 30 calendar days
Available amount of stable funding (ASF)
NSFR = >= 100%
Required amount of stable funding (RSF)
 New Features in BASEL-III
• Capital to Risk Weighted Asset Ratio (CRAR).

• Capital Conservation Buffer.

• Leverage Ratio.

• Liquidity Coverage Ratio (LCR).

• Net Stable Funding Ratio (NSFR).

• Countercyclical Capital Buffer (CCB).

• Domestic Systemically Important Banks (DSIBs).

 Special Features of BASEL-III

In order to improve the banking sector’s ability to absorb shocks

arising from financial and economic stress regardless the source,
Basel III mainly addressed the following areas:

 raise the quality and level of capital to ensure banks are better able
to absorb losses on both a going concern and a gone concern basis;
 increase the risk coverage of the capital framework;
 introduce leverage ratio to serve as a backstop to the risk-based
capital measure;
 raise the standards for the supervisory review process (Pillar 2); and
 public disclosures (Pillar 3) etc.
Thank You