Capital requirements
From Freepedia
Banks and depository institutions are regulated by governments to disclose and handle their capital in a certain way. The categorization of assets and capital is highly standardized so that it can be risk weighted. Internationally, the Basel Committee on Banking Supervision housed at the Bank for International Settlements influence each country's capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accords (Basel Accord). This framework is now being replaced by a new and significantly more complex capital adequacy framework commonly known as Basel II.
In the United States, "depository institutions" are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System (FRB). These guidelines are used to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets, as well as certain off-balance sheet exposures such as unfunded loan commitments, letters of credit, and derivative and foreign exchange contracts. The risk-based capital guidelines are supplemented by a leverage ratio requirement. To be “well-capitalized” under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 4%, a combined Tier 1 and Tier 2 capital ratio of at least 8%, and a leverage ratio of at least 4%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels.
Ratios
Tier 1 capital ratio = Tier 1 capital / Risk-adjusted assets
Total capital (Tier 1 and Tier 2) ratio = Total capital (Tier 1 and Tier 2) / Risk-adjusted assets
Leverage ratio = Tier 1 capital / Average total consolidated assets
Common stockholders’ equity ratio = Common stockholders’ equity / Balance sheet assets
Example
Capital ratios in Citigroup at the end of 2003. ([1])
| At year-end | 2003 |
|---|---|
| Tier 1 capital | 8.91% |
| Total capital (Tier 1 and Tier 2) | 12.04% |
| Leverage (1) | 5.56% |
| Common stockholders’ equity | 7.67% |
- (1) Tier 1 capital divided by adjusted average assets.
| In millions of dollars at year-end | 2003 |
|---|---|
| Tier 1 capital | |
| Common stockholders’ equity | $ 96,889 |
| Qualifying perpetual preferred stock | 1,125 |
| Qualifying mandatorily redeemable securities of subsidiary trusts | 6,257 |
| Minority interest | 1,158 |
| Less: Net unrealized gains on securities available-for-sale (1) | (2,908) |
| Accumulated net gains on cash flow hedges, net of tax (751) (1,242) | (751) |
| Intangible assets: (2) | |
| Goodwill | (27,581) |
| Other disallowed intangible assets | (6,725) |
| 50% investment in certain subsidiaries (3) | (45) |
| Other | (548) |
| Total Tier 1 capital | 66,871 |
| Tier 2 capital | |
| Allowance for credit losses (4) | 9,545 |
| Qualifying debt (5) | 13,573 |
| Unrealized marketable equity securities gains (1) | 399 |
| Less: 50% investment in certain subsidiaries (3) | (45) |
| Total Tier 2 capital | 23,472 |
| Total capital (Tier 1 and Tier 2) | $ 90,343 |
| Risk-adjusted assets (6) | $750,293 |
- (1) Tier 1 capital excludes unrealized gains and losses on debt securities available-for-sale in accordance with regulatory risk-based capital guidelines. The federal bank regulatory agencies permit institutions to include in Tier 2 capital up to 45% of pretax net unrealized holding gains on available-for-sale equity securities with readily determinable fair values. Institutions are required to deduct from Tier 1 capital net unrealized holding losses on available-for-sale equity securities with readily determinable fair values, net of tax.
- (2) The increase in intangible assets is primarily due to the acquisition of the Sears credit card portfolio in November 2003.
- (3) Represents unconsolidated banking and finance subsidiaries.
- (4) Includable up to 1.25% of risk-adjusted assets. Any excess allowance is deducted from risk-adjusted assets.
- (5) Includes qualifying subordinated debt in an amount not exceeding 50% of Tier 1 capital.
- (6) Includes risk-weighted credit equivalent amounts, net of applicable bilateral netting agreements, of $39.1 billion for interest rate, commodity and equity derivative contracts and foreign exchange contracts, as of December 31, 2003, compared to $31.5 billion as of December 31, 2002. Market risk-equivalent assets included in risk-adjusted assets amounted to $40.6 billion and $30.6 billion at December 31, 2003 and 2002, respectively. Risk-adjusted assets also includes the effect of other 88off-balance sheet99 exposures such as unused loan commitments and 88letters of credit99 and reflects deductions for certain intangible assets and any excess allowance for credit losses.
