Banks to have 7% Tier I capital under Basel: RBI

* RBI tightens norms to monitor ‘shadow banking’ activities

Written by ENS Economic Bureau | Mumbai | Published: May 3, 2012 12:35 am

The Reserve Bank of India (RBI) has stipulated that Indian banks will have to maintain Tier I capital,or core capital,of at least 7 per cent of their risk weighted assets on an ongoing basis.

The RBI has also tightened the norms to monitor banks’ investments,inter-connectedness and cross-holdings in the financial sector services which are beyond the active regulatory purview of the central bank — or shadow banking.

Under the existing Basel II framework,banks are required to maintain Tier I capital of at least 6 per cent of their risk weighted assets.

In its final guidelines on Basel III capital regulations issued on Wednesday,the RBI said,“The total capital ratio,including Tier I and Tier II,must be at least 9 per cent,unchanged from the current requirement compared with the Basel III minimum requirement of 8 per cent.”

Thus,within the minimum Capital to Risk (Weighted) Assets Ratio (CRAR) of 9 per cent,Tier 2 capital can be admitted maximum up to 2 per cent. The new guidelines are effective from January 1,2013 in a phased manner and will be will be fully implemented on March 31,2018.

For the fiscal year ending March 31,2013,banks will have to disclose capital ratios computed under the existing guidelines,as well as those computed under the Basel III framework,the central bank said.

Common Equity Tier 1 (CET1) capital must be at least 5.5 per cent of risk weighted assets (RWAs). Banks are also required to maintain a capital conservation buffer (CCB) of 2.5 per cent of RWAs in the form of Common Equity Tier 1 capital.

The investment of banks in the regulatory capital instruments of other financial entities came in for criticism during the crisis because of their contribution to inter-connectedness amongst the financial institutions.

In addition,these investments also amounted to double counting of capital in the financial system.

Therefore,under Basel III,these investments have been subjected to stringent treatment in terms of deduction from respective tiers of regulatory capital.

“It will help ensure that when capital absorbs a loss at one financial institution this does not immediately result in the loss of capital in a bank which holds that capital,” the RBI said.

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