Capital Management an Adequacy Flashcards
what are the 5 main functions of capital adequecy?
- absorb unanticipted losses
- proctect uninsured customers
- protext FI insurance funds/taxpayer
- proctect against insurance premium/lower cost of borrowing
- fund investment activities
for market value, what happens when loans decrease in value?
net worth of the bank (equity decreases).
losses are first absorbed by equity holders, what happens when losses exceed equity?
liability holders will be affected, ie depositors
which items are measured at BV instead of market value?
shares
surplus in shares
retained earnings
loan loss reserve
what are the weakness of market value?
difficult to implement
unnecessary variability
FIs less willing to take on long term investments
why are there strong regulations on capital?
limit risk of FI failure
preserve public confidence
limit government loss
what is the leverage ratio?
core cap/total assets
what are the leverage ratios weaknesses?
uses MV
doesn’t take into account different risks of assets
doesn’t account for OBS activites
risk based capital ratios are used in basel 1 and 2, which risks do they cover? why is there a difference?
B1- credit and market risk
B2- credit, market and operational risk
what type of capital is tier 1 capital?
common stock
retainer earnings
perpetual preferred stock
what type of capital is tier 2 capital?
reserves from loan and lease losses
debt capital instruments
what is the Tier 1 adequecy ratio? how much does the value nee to be?
T1/TA must equal 4 %
what is the total capital adequecy ratio? how much does the value nee to be?
Total regualtory cap/ TA must be at least 8%
what are the changed amounts for Basel 3 for capital requirements?
Common equity/ TA must be at least 4.5%
T1/TA must equal 6 %
Total regualtory cap/ TA must be at least 8% (same)
