POLYTECHNIC UNIVERISTY OF THE PHILIPPINES

STA. MESA, MANILA

PURPOSE OF THE
CAPITAL OF THE
BANK

BY GROUP 10
JOHN PAOLO CANJA
GUIA KELLY CUARESMA
PRINCE HAROLD RECALCAR
BBF 3-11s

Banks Capital
 - Is the difference between the reported values of the banks assets and
liabilities.

The sum recorded in the capital accounts come from (3) sources namely:

1. The capital subscribed by the incorporators;

2. The capital build up through sale of debentures or long term debt obligation
and;
3. Appropriation from the earnings of the bank.

The primary functions of bank capital are:

1. To absorb losses;
2. To meet the demand of the depositors;
3. For the acquisition of bank assets needed for operation.
4. Providing a margin of safety for the depositors and creditors.

Banks should comply with the required minimum capital enumerated below or as
may be prescribed by the Monetary Board:

Revised Type of Bank

Amounts
(In Million Pesos)
a. Universal Banks 4,950.0
b. Commercial Banks 2,400.0
With head office in 1,000.0
Metro Manila
c. Thrift With head office in 500.0
Banks cities of Cebu and
Davao
Other Areas 250.0
d. Rural In Metro-Manila 100.0
Banks

Cities of Cebu and 50.0

Davao
In all other cities 25.0
e. Cooperative Banks 10.0

I. Capital requirement (also known as regulatory capital or capital

adequacy) is the amount of capital a bank or other financial institution has
to hold as required by its financial regulator.
 The Basel Accords is a set of recommendations for regulations in the banking
industry.

BASEL I is primarily focused on credit risk and appropriate risk-weighting of

assets.
(Reported by: John Paolo Canja)

BASEL II
Basel II is a set of proposals that aim to revise Basel I to make regulatory capital
requirements more risk sensitive and reflective of all, or at least most of the risks banks are
exposed to. In addition, Basel II also puts emphasis on banks own risk assessment,
supervisory review, and the important role that disclosures play. As such, Basel II is
structured as a three-pillar approach that transcends regulatory capital requirements. That
is, Basel II not only prescribes a risk-based capital framework, but an entire risk-based
supervisory framework.

Basel 2 is a three-pronged approach relying on so called 3 Pillars:

1. Minimum Capital Requirements (Pillar 1)

On minimum capital requirements, major changes in the revised framework
include the addition of specific capital requirements for credit derivatives,
securitization exposures, counterparty risk in the trading book, and
operational risk.
The capital requirement for credit derivatives is an extension of Circular No.
417 dated 28 January 2004, which covers only investments in credit-linked
notes. The revised framework now covers all exposures to credit-linked
notes (protection buyer and protection seller), as well as other credit
derivatives, such as credit default swaps and total return swaps. The same
thing is also true for the capital requirement for securitization exposures.
The revised framework extends the coverage of Circular No. 468 dated 12
January 2005 to include capital requirements not only for investments in
securitization but also other securitization exposures, such as retained
interest of originators, liquidity facilities, etc. The capital requirement for
counterparty risk in the trading book, on the other hand, is a new element in
the revised framework especially for repo transactions and structured
products booked in the trading book.
Operational risk capital requirement, meanwhile, is a totally new element in
the revised framework. For this purpose, the Monetary Board approved a
uniform basic charge of 15 percent of gross income as the simplest option.
2. Supervisory Review Process (Pillar 2)
 One of the principles underlying Pillar 2 of Basel II states that supervisors
should intervene at an early stage to prevent capital from falling below the
minimum levels and should require rapid remedial action if capital is not
maintained or restored. To satisfy this principle, the BSP issued Circular No.
523 dated 23 March 2006, effectively overhauling BSPs prompt corrective
action framework to meet Basel II standards.

3. Market Discipline (Pillar 3)

On market discipline, one of the changes in the revised framework approved
by the Monetary Board is the expanded list of items that banks need to
disclose in their Annual Reports and in their quarterly published statement of
condition.
This expanded list of disclosure requirements is aimed to support existing
disclosure regulations. It is also aimed to empower the market so it can
reward banks that manage risk effectively and penalize those whose risk
management is imprudent.
The expanded disclosure requirements relate to banks (a) capital structure
and adequacy, and (b) risk management policies and processes and risk
exposures, specifically on credit risk, market risk, operational risk, and
interest rate risk in the banking book.

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 management of the banking sector. These measures aim to:

improve the banking sector's ability to absorb shocks arising from financial
and economic stress, whatever the source.

improve risk management and governance

strengthen banks' transparency and disclosures.

The reforms target:

bank-level, or microprudential, regulation, which will help raise the resilience

of individual banking institutions to periods of stress.

macroprudential, system wide risks that can build up across the banking
sector as well as the procyclical amplification of these risks over time.

(Reported by: Guia Kelly Cuaresma)

The reserve requirement (or cash reserve ratio) is a central bank regulation
employed by most, but not all, of the world's central banks, that sets the minimum
amount of reserves that must be held by a commercial bank. The amount of
required minimum reserves is generally determined by the central bank as being
equal to no less than a specified percentage or fraction of the amount of deposit
liabilities that the commercial bank owes to its customers. The commercial bank's
reserves normally consist of cash owned by the bank and stored physically in the
bank vault (vault cash), plus the amount of the commercial bank's balance in that
bank's account with the central bank.

Capital Adequacy Ratio (CAR), also known as Capital to Risk (Weighted)

Assets Ratio (CRAR),[1] is the ratio of a bank's capital to its risk. National
regulators track a bank's CAR to ensure that it can absorb a reasonable amount of
loss and complies with statutory Capital requirements.

It is a measure of a bank's capital. It is expressed as a percentage of a

bank's risk weighted credit exposures.

This ratio is used to protect depositors and promote stability and efficiency of
financial systems around the world.

Two types of capital are measured: tier one capital, which can absorb losses
without a bank being required to cease trading, and tier two capital, which can
absorb losses in the event of a winding-up and so provides a lesser degree of
protection to depositors.

FORMULA

Capital adequacy ratios (CARs) are a measure of the amount of a bank's core
capital expressed as a percentage of its risk-weighted asset.

Capital adequacy ratio is defined as:

Tier 1 Capital + Tier 2 Capital

CAR= Risk Weighted Asset

TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) -

(equity investments in subsidiary + intangible assets + current & brought-forward
losses)

TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss reserves + C) hybrid

debt capital instruments and subordinated debts
where Risk can either be weighted assets ( or the respective national
regulator's minimum total capital requirement. If using risk weighted assets,

T1 + T2

CAR= a 10%

The percent threshold varies from bank to bank (10% in this case, a common
requirement for regulators conforming to the Basel Accords) and is set by the
national banking regulator of different countries.

Two types of capital are measured: tier one capital (T1) which can absorb losses
without a bank being required to cease trading, and tier two capital (T2) which can
absorb losses in the event of a winding-up and so provides a lesser degree of
protection to depositors.

Capital adequacy ratio is the ratio which determines the bank's capacity to
meet the time liabilities and other risks such as credit risk, operational risk etc. In
the most simple formulation, a bank's capital is the "cushion" for potential losses,
and protects the bank's depositors and other lenders. Banking regulators in most
countries define and monitor CAR to protect depositors, thereby maintaining
confidence in the banking system.

CAR is similar to leverage; in the most basic formulation, it is comparable to

the inverse of debt-to-equity leverage formulations (although CAR uses equity
over assets instead of debt-to-equity; since assets are by definition equal to debt
plus equity, a transformation is required). Unlike traditional leverage, however, CAR
recognizes that assets can have different levels of risk.

The reserve requirement (or cash reserve ratio) is a central bank regulation
employed by most, but not all, of the world's central banks, that sets the minimum
amount of reserves that must be held by a commercial bank. The amount of
required minimum reserves is generally determined by the central bank as being
equal to no less than a specified percentage or fraction of the amount of deposit
liabilities that the commercial bank owes to its customers. The commercial bank's
reserves normally consist of cash owned by the bank and stored physically in the
bank vault (vault cash), plus the amount of the commercial bank's balance in that
bank's account with the central bank.

(Reported by: Prince Harold Recalcar)