March 4, 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 4, 2016)
Revaluation Reserve, Foreign
Currency Translation Reserve & Deferred Tax Assets:
The
RBI has come out with three amendments to include in Tier I, the revaluation
reserve (at 55% discount), foreign currency translation reserve (at 25%
discount) and Deferred Tax Assets (capped at 10%).
Revaluation
Reserve is the amount added to the original acquired value of the asset in
order to show its true value. Most of the banks, especially public sector ones
are sitting on huge properties across the country bought at ridiculously low
prices as compared to current land and real estate prices. Revaluation Reserve
was allowed as a Tier-II capital by the central banker earlier. This has now
been shifted to Tier-I in compliance with Basel-III guidelines.
(i.e. Revaluation reserves arise from
the revaluation of assets that are undervalued on the bank’s books, typically
bank premises.)
As for foreign currency translation reserve (FCTR),
which allows 25% of the reserve to be included in the Tier-I calculation is
formed due to translation differences which arise as a result of translating
the financial statement items from the functional currency into the
presentational currency using the exchange rate at the balance sheet date,
which differs from the rate in effect at the last measurement date of the
respective item. Banks with foreign operations and exposures generally create
this reserve.
(i.e. the
foreign currency translation reserves arising due to the translation of
financial statements of a bank’s foreign operations to the reporting currency
would also be considered as Tier-I capital.)
The third amendment is on deferred tax assets (DTA)
which will be capped at 10% of the bank’s Tier I capital. DTAs arise due to
timing difference (and not due to losses) which are presently deducted from
Tier I capital at 60% and AT 1 (additional tier 1) capital at 40%.
[The Amendment one, two and three in nutshell:
--- Banks can now apply gains from revaluation of
property to core capital requirements
--- The RBI also said conversions of foreign currency
in financial statements can now more easily be considered common equity
capital, while also easing rules on counting deferred tax assets.]
Tier-I capital and Tier-II
capital:
--- 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.”
[ Note:
After amendments RBI has allowed Revaluation Reserves in Tier I capital:
--- In 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.
--- 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. ]
Basel III:
Basel III is a comprehensive set of reform measures,
developed by the Basel Committee on
Banking Supervision, to strengthen the regulation, supervision and risk of the
banking sector.
The Basel III reform measures aim to:--- Improve the banking
sector's ability to absorb shocks arising from financial and economic stress--- Improve risk management
and governance--- Strengthen banks'
transparency and disclosures.
References:
(Source: http://www.asianage.com/business/sensex-cheers-rbi-s-bank-capital-rules-jumps-464-points-120
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