Basel Capital Requirements


Basel Capital Requirements:

Banks are required to maintain adequate capital to cover for unexpected losses and risks in their on and off balance sheet exposures. As per Basel III standards, regulatory capital is divided into different classes and is comprised of the following:

 

  • Tier 1 (going-concern capital):
    a) Common Equity Tier 1
    b) Additional Tier 1

 

  • Tier 2 Capital (gone-concern capital)

 

For each of the classes of capital, there is a set of criteria that capital instruments are required to meet before inclusion in the relevant category.  Regulatory capital is also subject to regulatory adjustments.

 

The minimum capital requirements are set as follows:

 

Minimum Capital Requirements Capital Conservation Buffer Total Capital Requirements
CET1 Capital 5.5% 2.5% 8%
T1 Capital 7.5% 2.5% 10%
Total Capital 9.5% 2.5% 12%

 

The capital conservation buffer of 2.5%, comprised of Common Equity Tier 1, is established above the regulatory minimum capital requirement, and is designed to ensure that banks build up capital buffers outside periods of stress which can be drawn down as losses are incurred.

 

As per BDL Circular 119, banks are also required to allocate additional capital to cover their own specific risks and uncertainties.

 

Basel References
Title Date of Issue 
Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems  01/06/2011
Basel II: International Convergence of Capital Measurement & Capital Standards  30/06/2006