12.26 ndian onom
The first Basel Accord, known as Basel disclosed reserves of the bank—equity capital
I focuses on the capital adequacy of financial can’t be redeemed at the option of the holder and
institutions. The capital adequacy risk (the risk a disclosed reserves are the liquid assets available
financial institution faces due to an unexpected with the bank itself.
loss), categorises the assets of financial institution Tier 2 Capital: A term used to describe the
into five risk categories (0 per cent, 10 per cent, capital adequacy of a bank—it can absorb losses
20 per cent, 50 per cent, 100 per cent). Banks that in the event of a winding-up and so provides a
operate internationally are required to have a risk lesser degree of protection to depositors. Tier II
weight of 8 per cent or less. capital is secondary bank capital (the second most
The second Basel Accord, known as Basel reliable forms of capital). This is related to Tier
II, is to be fully implemented by 2015. It focuses 1 Capital. This capital is a measure of a bank’s
on three main areas, including minimum capital financial strength from a regulator’s point of
requirements, supervisory review and market view. It consists of accumulated after-tax surplus
discipline, which are known as the three pillars. The of retained earnings, revaluation reserves of fixed
focus of this accord is to strengthen international assets and long-term holdings of equity securities,
banking requirements as well as to supervise and general loan-loss reserves, hybrid (debt/equity)
enforce these requirements. capital instruments, and subordinated debt and
The third Basel Accord, known as Basel III undisclosed reserves.
is a comprehensive set of reform measures aimed Tier 3 Capital: A term used to describe the
to strengthen the regulation, supervision and capital adequacy of a bank—considered the
risk management of the banking sector. These tertiary capital of the banks which are used to
measures aim to46: meet/support market risk, commodities risk and
(i) improve the banking sector’s ability to foreign currency risk. It includes a variety of
absorb shocks arising from financial and debt other than Tier 1 and Tier 2 capitals. Tier
economic stress, whatever the source be; 3 capital debts may include a greater number of
(ii) improve risk management and subordinated issues, undisclosed reserves and
governance; and general loss reserves compared to Tier 2 capital.
(iii) strengthen banks’ transparency and To qualify as Tier 3 capital, assets must be limited
to 250 per cent of a bank’s Tier 1 capital, be
disclosures.
unsecured, subordinated47 and have a minimum
The capital of the banks has been classified
maturity of two years.
into three tiers as given below:
Disclosed Reserves are the total liquid cash
Tier 1 Capital: A term used to describe the capital and the SLR assets of the banks that may be used
adequacy of a bank—it can absorb losses without any time. This way they are part of its core capital
a bank being required to cease trading. This is (Tier 1). Undisclosed Reserves are the unpublished
the core measure of a bank’s financial strength or hidden reserves of a financial institution that
from a regulator’s point of view (this is the most may not appear on publicly available documents
reliable form of capital). It consists of the types
of financial capital considered the most reliable 47. Subordinated debt ranks below other debts with regard
to claims on assets or earnings (also known as a ‘junior
and liquid, primarily stockholders’ equity and debt’). In the case of default, such creditors get paid out
until after the senior debtholders were paid in full. Thus,
46. Bank of International Settlemets, Basel, Switzerland, such capitals of banks are more risky than unsubordinated
15 May, 2012. debt.