March 2, 2016: RBI eases
tier-1 capital regulations and hence allows banks to expand capital base to
meet Basel III norms
General Studies: Daily Capsule
Curtain Raiser –News Update (March 2, 2016)
RBI
lends a helping hand to banks with low capital/ RBI allows banks to
expand capital base to meet Basel III norms/ RBI eases tier-1 capital
regulations for banks
“While calculating Tier
I capital, banks include share capital, share premium and other reserves
(excluding revaluation reserves). In the case of Tier II capital, provisions or
loan-loss reserves, which are freely available to meet losses, are included.
“Also, revaluation reserves at 55 per cent discount are included
for Tier II capital calculation.
Revaluation
reserves arise from the revaluation of assets that are undervalued on the
bank’s books, typically bank premises.
Now,
the RBI has allowed revaluation reserves (at 55 per cent discount) to be
included in Tier I (CET 1 — common equity) capital, instead of Tier II. How
does this re-jig of including revaluations reserves from Tier II to Tier I
matter to banks?
“Tier 1 capital is the core capital and is used
to absorb losses. Tier II, on the other hand, is supplementary capital. Thus,
it is Tier I capital that is a true measure of a bank’s financial health.”
“At a time when public sector banks (PSBs) have
been struggling with a low capital base, the Reserve Bank of India (RBI) has
allowed banks to beef up its capital adequacy by including certain items such
as property value, foreign exchange for calculation of its Tier-I capital.”
“Current norms under Basel
III require banks to maintain a minimum capital adequacy of 9% and a tier-I
ratio of 7%. Capital adequacy is a measure of a bank’s financial strength,
expressed as a ratio of capital to risk-weighted assets.”
http://www.livemint.com/Money/3rydoArRpjsSFxQAe9y6sK/Banking-stocks-surge-after-RBI-eases-capital-regulations.html
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