The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted. Internationally, the Basel Committee on Banking Supervision housed at the Bank for International Settlements influence each country's banking capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Accord. This framework has been replaced by a significantly more complex capital adequacy framework commonly known as Basel II. After 2012 it will be replaced by Basel III.
Rating factors:
Capital is rated based on the following considerations:
· Nature and volume of problem assets in relation to total capital and adequacy of LLR and other reserves.
· Balance sheet structure including off balance sheet items, market and concentration risk.
· Nature of business activities and risks to the bank.
· Asset and capital growth experience and prospects.
· Earnings performance and distribution of dividends.
· Capital requirements and compliance with regulatory requirements.
· Access to capital markets and sources of capital.
· Ability of management to deal with above factors.
Capital rating 1:
Rating “1” is characterized by:
· Capital levels and ratios exceed all regulatory requirements.
· Strong earnings performance.
· Well managed and controlled growth.
· Competent management able to analyze the risks associated with the activities in determining appropriate capital levels.
· Reasonable dividends and ability to raise new capital.
· Low volume of problem assets.
Capital rating 2:
Rating “2” is characterized by similar criteria as “1”, but experiences weaknesses is one or more of the factors. For example:
· Capital and solvency ratios exceed regulatory requirements, but:
1. Problem assets relatively high
2. Management inability to maintain sufficient capital to support risks
Capital rating 3:
Rating”3”indicates that the bank complies with capital adequacy and solvency regulatory requirements, but has major weaknesses in in one or more factors:
· High level of problem assets in excess of 25% of total capital.
· Bank fails to comply with regulatory regulations.
· Poor earnings.
· Inability to raise new capital to meet regulatory requirements and correct deficiencies.
· It requires regulatory oversight to ensure management and shareholders address the issues of concern.
Rating factors:
Capital is rated based on the following considerations:
· Nature and volume of problem assets in relation to total capital and adequacy of LLR and other reserves.
· Balance sheet structure including off balance sheet items, market and concentration risk.
· Nature of business activities and risks to the bank.
· Asset and capital growth experience and prospects.
· Earnings performance and distribution of dividends.
· Capital requirements and compliance with regulatory requirements.
· Access to capital markets and sources of capital.
· Ability of management to deal with above factors.
Capital rating 1:
Rating “1” is characterized by:
· Capital levels and ratios exceed all regulatory requirements.
· Strong earnings performance.
· Well managed and controlled growth.
· Competent management able to analyze the risks associated with the activities in determining appropriate capital levels.
· Reasonable dividends and ability to raise new capital.
· Low volume of problem assets.
Capital rating 2:
Rating “2” is characterized by similar criteria as “1”, but experiences weaknesses is one or more of the factors. For example:
· Capital and solvency ratios exceed regulatory requirements, but:
1. Problem assets relatively high
2. Management inability to maintain sufficient capital to support risks
Capital rating 3:
Rating”3”indicates that the bank complies with capital adequacy and solvency regulatory requirements, but has major weaknesses in in one or more factors:
· High level of problem assets in excess of 25% of total capital.
· Bank fails to comply with regulatory regulations.
· Poor earnings.
· Inability to raise new capital to meet regulatory requirements and correct deficiencies.
· It requires regulatory oversight to ensure management and shareholders address the issues of concern.
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