Adequacy of equity capital of credit institutions. Bank's own capital
The problem of determining bank capital adequacy has long been the subject of scientific research and debate between banks and regulatory authorities. Banks prefer to make do with a minimum of capital in order to increase profitability and asset growth; bank controllers require large amounts of capital to reduce the risk of bankruptcy. At the same time, it is argued that bankruptcies are caused by poor management, and that well-managed banks can exist with low capital standards.
The term "capital adequacy" reflects the overall assessment of the bank's reliability and the degree of its exposure to risk. Treating capital as a “buffer” against losses creates an inverse relationship between the amount of capital and the bank’s exposure to risk. This implies the basic principle of adequacy: the size of equity capital must correspond to the size of assets, taking into account the degree of their risk.
At the same time, commercial banks always take into account in their work that excessive “capitalization” of the bank, the issue of an excessive number of shares
The underestimated share of capital in the bank's resources has been criticized. We are talking about the disproportionate responsibility of the bank and its depositors (or the state - under the deposit insurance system). A bank's liability is limited to its capital, and depositors and other creditors risk a much larger amount of funds entrusted to the bank. There are also a number of factors that determine the requirements for increasing bank capital: a) the market value of bank assets is more volatile than that of industrial enterprises - it changes with changes in interest rates, with the deterioration of the creditworthiness of borrowers; b) the bank relies more on non-permanent sources of short-term debt, many of which can be withdrawn on demand. Therefore, any political or economic event can provoke a massive outflow of bank resources. It is known that at the turn of the century the ratio of capital to assets averaged 20% for banks, but today it is only close to 8%. That is, the solvency risk of the banking system has increased over time because asset quality has not improved enough to compensate for the lower share of capital.
The fact that the adequacy of bank capital determines public confidence in a particular commercial bank and the banking system as a whole puts it among the indicators under the control of the state represented by the central bank. Maintaining a sufficient level of total capital is one of the conditions for the stability of the banking system.
It is difficult to determine exactly the amount of capital that a bank or the banking system as a whole should have, but it must be sufficient to perform the functions already discussed, the confidence of depositors and regulatory authorities. The amount of capital required depends on the risk taken by the bank. If, for example, the loans provided by the bank involve greater risk, more capital funds are required. When determining the amount of capital required, the bank faces an alternative: increase its capital as risk increases or invest in assets that do not involve increased risk. Thus, whether a bank's capital is adequate or not depends on the quality of its assets, quality of management, operating policies and the amount of risk the bank bears.
For a long time, commercial banks and society have sought to develop a system of standards that could be applied when checking the capital adequacy of a bank or the banking system as a whole.
One of the longest-used ratios is the capital-to-deposit ratio. It was widely used in the United States by the Office of the Comptroller of the Currency back in the early 20th century. It was established that 10% of the amount of deposits in the bank should be covered by capital. The bank is able to pay with its own funds a tenth of the deposits when their mass outflow begins. This indicator is quite simple, and on its basis it is easy to compare banks, which remains its popularity among banking financial services to this day.
In the 40s, this indicator was replaced by another indicator - the ratio of capital to total assets. It was believed that the composition and quality of bank assets are the main cause of bankruptcies; the feasibility of the indicator stemmed from the reflection of losses in the Western banking balance sheet in the form of a decrease in total assets. This ratio indicated what losses the bank could suffer without harm to depositors, and was approximately 8%. Improvement of the indicator led to the introduction of a coefficient - the ratio of capital to risky assets, which offers an objective assessment of the size of the reduction in the volume of assets. This ratio measures the ratio of total capital to those assets that contain the possibility of loss without attempting to define the loss from any risky asset or category of risky assets. They also proposed coefficients based on excess capital (total capital minus the cost of common shares), since it primarily goes to cover losses, and other indicators.
The issue of methodology for assessing bank capital became the subject of discussion in international financial organizations (Bank for International Settlements) in the second half of the 80s. The goal was to develop general capital adequacy criteria acceptable to banks regardless of their country of origin. In July 1988, under the auspices of the Basel Committee on Banking Regulation and Supervision, the “Agreement on the International Harmonization of Capital Calculation and Capital Standards” was concluded, which introduced the adequacy standard, usually called the “Cook's ratio”. It came into force in 1993 and is currently used as a benchmark by the central banks of many countries. The peculiarity of this standard is that it applies only to international banks, i.e. having branches, subsidiaries or joint banks abroad.
The Cook's ratio sets the minimum ratio between a bank's capital and its on- and off-balance-sheet assets, weighted by risk according to norms that may vary by country, but must follow a certain logic. The coefficient is set at 8% (with core or fixed capital accounting for at least half of this 8%). Own capital includes two elements: core and additional capital. To evaluate them, it is enough
The choice was to weight assets and off-balance sheet liabilities (rather than use the balance sheet total). This approach ensures the inclusion of off-balance sheet transactions and encourages investment in low-risk assets.
Essentially, the Basel Accord standardized the assessment of credit and country risks. Interest rate and market risk were not managed under this methodology until 1997.
Currently, the Basel Committee has developed recommendations for calculating the capital adequacy ratio taking into account interest rate and market risks.
Depending on the risk assessment, assets are weighed. The greatest difficulties are caused by the assessment of transactions taken into account off the balance sheet. This is due to their diversity in each country and sometimes insignificant volume. Each country has some latitude in interpreting risk and applying the Basel Committee recommendations, but the recommendations insist on converting all off-balance sheet liabilities into equivalent credit risk using a specific conversion factor. The results obtained are then weighted in the same way as in the case of balance sheet transactions. This does not allow many banks to use the practice of removing risky types of assets from their balance sheets by introducing new financial instruments. Thus, a uniform assessment of the total risk across all bank assets is carried out.
The Basel system has become increasingly widespread. Thus, within the EU there is a single solvency ratio, similar to the Cook coefficient, but applicable to the entire system of credit institutions, and not just to large international banks.
The development of a holistic approach to assessing equity capital adequacy is especially important for the modern Russian banking system. Commercial banks in our country operate under increasingly unfavorable conditions. Numerous cases of bankruptcy and closure of banks, the lack of a centralized deposit insurance system require careful analysis and statistical research to determine the level of capital adequacy of commercial banks.
In accordance with the Basel Accord, the bank's capital is divided into Tier 1 capital and Tier 2 capital.
Tier 1 (principal) capital includes common stock, non-dividend retained earnings, perpetual preferred stock, and non-controlling interests in consolidated subsidiaries less intangible capital stock.
Banks are allowed to show on their balance sheets the intangible capital stock that arises when they purchase a bank or non-bank firm for cash. New international standards imply that, when determining the minimum required amount of a bank's share capital, its intangible capital must be deducted from its total capital.
Tier 2 capital (additional) includes reserves for general losses on active operations, to cover loan losses, cumulative term preferred shares, subordinated debt.
New international capital standards allow subordinated debt with an original average maturity of 5 years to be considered as the source of the additional capital required.
However, no form of additional capital can constitute more than 50% of the fixed capital. After 1992, allowable reserves for loan and lease losses are also considered part of additional capital, provided they are general (not special) reserves and do not exceed 1.25% of banks' risk-weighted assets.
The components of Tier 2 capital are independently regulated by the signatories to the Basel Accord; in this case, the 2nd level capital cannot be more than 100% of the 1st level capital.
The provisions included in Tier 2 capital for the event of loan defaults have been limited since 1992 to 1.25% of risk-weighted assets, and the total amount of secondary debt and medium-term preferred shares that are subject to amortization at maturity cannot exceed 50% of Tier 1 capital. Other components of Tier 2 capital have no restrictions, and all amounts exceeding the established standards are permissible, but are not counted as capital.
The new harmonized capital requirements, which were to come into effect before 31 December 1992, were:
1) The ratio of Tier 1 capital to risk-weighted assets and off-balance sheet transactions must be at least 4%.
2) The ratio of total capital (i.e. the sum of Tier 1 and Tier 2 capital) to total risk-weighted assets and off-balance sheet transactions must be at least 8%.
The agreement also provided for a transition period (1990-1992), during which these indicators were to be 3.65 and 7.25%, respectively.
The approach to determining capital adequacy proposed by the Basel Committee has the following main advantages:
- characterizes the “real” capital of the bank;
- promotes a review of banks' strategy and a refusal to excessively increase loans with minimal capital, giving preference not to the volume of the loan portfolio, but to its quality;
- helps to increase the share of non-risk activities of the bank;
- encourages the government to reduce regulation of banking activities, since it shows more elements of self-regulation,
- makes it possible to take into account risks related to off-balance sheet obligations;
- allows you to compare banking systems of different countries.
However, it should be noted that, along with the advantages of the proposed method for calculating bank capital adequacy, it has a number of significant disadvantages. The main ones are:
- lack of sufficient clarity in defining the constituent elements of capital by level, which makes it possible to soften capital requirements on the part of individual banks,
- insufficiently detailed differentiation of assets by risk level;
- underestimation of reserve requirements for certain types of operations;
- focus on assessing capital adequacy only for credit risk,
- absence of dependence of the amount of capital on market and interest rate risks, which are very important in the bank’s activities.
In order to clarify the calculation of bank capital adequacy taking into account interest rate and market risks, amendments to the Agreement on Capital Requirements were adopted in July 1997. In accordance with these amendments, within the time limits established by banking supervisors, banks will be required to measure and make capital charges , adjusting it for market risks in addition to credit risks. Market risk is the risk of losses on balance sheet and off-balance sheet positions caused by changes in market price levels.
This requirement applies to the following types of risks:
- risks associated with interest rate-based and equity instruments in the trading portfolio;
- currency and commodity risks (purchase and sale of securities) for all bank operations.
Tier 1 and Tier 2 capital can be used primarily to cover market risk. At the discretion of national authorities, banks may use Tier 3 capital, which consists of short-term subordinated debt (at least 2 years), subject to the following conditions:
- banks can use Tier 3 capital only to support market risk caused by changes in market price levels. This means that any capital requirements arising from credit or counterparty risk under the terms of the 1988 Capital Adequacy Agreement, including counterparty risk that arises from the use of derivatives in a trading and banking book, must be met under the terms of that agreement (i.e. covered by Tier 1 and Tier 2 capital);
- Tier 3 capital required to support market risk should be no more than 250% of Tier 1 capital. Tier 3 capital can be short-term subordinated debt, which should be considered as capital, provided that the latter, if circumstances so require, can become part of the bank's permanent capital and be used to cover losses in the event of its insolvency.
Therefore, at a minimum it should be:
- unsecured, subordinated and fully paid,
- have an initial term of at least 2 years,
- must not be repaid before the original due date, unless permitted by the supervisory authorities,
- there must be a capital lock-in clause, which states that neither interest payments nor principal can be paid (even at maturity) if such payments would put the bank in breach of its minimum capital requirements.
In domestic practice, the procedure for calculating the capital adequacy ratio for commercial banks is established by the relevant documents of the Central Bank of the Russian Federation. The main ones are Instruction of the Central Bank of Russia dated October 1, 1997 No. 1 “On the procedure for regulating the activities of banks” and Regulations of the Central Bank of the Russian Federation dated June 1, 1998 No. 31-P “On the methodology for calculating the own funds (capital) of credit organizations” with their subsequent changes and additions. The listed regulatory documents establish the minimum amount of authorized capital for newly created credit institutions, the minimum amount of equity capital for existing credit institutions, the general procedure for calculating the absolute and relative amount of capital and its distribution into main and additional capital in accordance with the recommendations of the Basel Committee.
It should be noted that the Central Bank of the Russian Federation continues to tighten the requirements for the absolute and relative amount of capital, bringing them into line with international standards.
The minimum amount of authorized capital for newly created credit institutions should be:
- 01.01.98 - an amount equivalent to 4.0 million ECU;
- 07/01/98 - 5.0 million ECU.
The minimum amount of bank equity capital, defined as the sum of the authorized capital, bank funds and retained earnings, is established from January 1, 1999 in an amount equivalent to 5.0 million euros. Banks whose equity capital will be within amounts equivalent to EUR 1.0 million to EUR 5.0 million will be subject to restrictions on certain transactions. In particular, these banks will not be able to conduct operations outside the Russian Federation (except for opening and maintaining correspondent accounts in non-resident banks to carry out settlements on behalf of individuals and legal entities), operations to attract and place precious metals; open branches and create subsidiaries abroad; participate in the capital of credit organizations in an amount exceeding 25% of the capital of these credit organizations.
The calculation of the bank's capital adequacy ratio is carried out in the following sequence. Initially, the absolute value of capital is determined; then the amount of risk-weighted assets and the reserves created by the bank to cover possible losses on active operations are calculated.
When calculating the absolute value of equity capital, the following elements are accepted:
Sum of balances on balance sheet accounts:
1. Bank funds - authorized capital (account 102 + account 103 + account 104); additional capital (account 106); funds (account 107).
Balances on balance sheet account 104 (authorized capital of non-joint-stock banks) are taken into account in the amount of actually paid authorized capital, but not higher than the registered one.
2. Current income of the bank (account 701), reduced by the current expenses of the bank (account 702).
3. Future income in the form of positive differences on individual bank operations (accumulated interest (coupon) income received in advance on interest (coupon) obligations - account 61305; revaluation of funds in foreign currency - account 61306; revaluation of securities - account 61307; revaluation of precious metals - account 61308) minus negative differences on the same bank transactions (accounts 61405 + 61406 + 61407 + 61408).
4. Retained earnings of the bank minus losses of the current and previous years (accounts 703 - 704 - 705).
5. Reserves for possible loan losses created for loans of the 1st risk group (according to the bank’s analytical accounting data).
6. Reserves for impairment of investments in securities:
- in shares of subsidiaries and dependent joint stock companies (account 60105);
- in bank shares acquired for resale and investment (analytical accounting data for account 50804);
- into other shares, shares of non-resident banks and other shares of non-residents (analytical accounting data for accounts 50904, 51004, 51104).
The bank's capital is reduced by the amount:
- shares and shares purchased by joint-stock and non-joint-stock banks (account 105);
- diverted funds for settlements with bank organizations for allocated funds (account 60319);
- accrued but not paid by the bank on time (overdue) interest (part of account 61401);
- loans, guarantees and sureties provided by the bank to its participants (shareholders) and insiders in excess of the limits established by the risk standards per borrower and the maximum amount of loans, borrowings, guarantees and sureties provided by the bank to its insiders;
- under-created reserves for possible loan losses and for depreciation of investments in securities (the difference between the estimated amount of reserves required by the regulations of the Central Bank of the Russian Federation and the actual amount of reserves created), with the exception of the amount of under-created reserve for the amount of loans provided to participants (shareholders ) bank and insiders;
- balances on account 10601 “Increase in property value during revaluation”, exceeding the amount of revaluation of bank property carried out before January 1, 1997;
- overdue receivables lasting more than 30 days from the moment they were recorded in the corresponding balance sheet accounts (analytical accounting data for accounts receivable accounting);
- the excess of investments in tangible and intangible assets over the sources of their financing. To make such an adjustment to the bank's capital, it is necessary to make a preliminary calculation. The sum of debit balances of accounts for accounting for tangible and intangible assets (604 + 605 + 607 - 606 + 609 (A-P) + 610) is compared with the sum of balances of passive accounts (102+ 103+ 104-105 + 106 + 107 +(701 -- 702) + (703 - 704 - 705). If the sum of sources is higher than the sum of investments in tangible and intangible assets, then the positive result is not taken into account. If investments in tangible and intangible assets exceed the sources (negative result), then the bank's capital. is reduced by the entire amount of debit balances on the above accounts, reduced by the amount of depreciation;
- investments of the bank in shares (participation interests) of other banks and business entities, including non-resident credit organizations acquired for investment, if the block of shares (participation) exceeds 20% of the authorized capital of the issuing organization, as of the date of calculation of the bank’s capital (analytical accounting data for the accounts 50903, 51003, 51103,60202,60203,60204);
- shares of banks acquired for resale (account 50802) and investment (account 50803);
- participation in subsidiaries and dependent joint stock companies (account 601 A);
- bank funds contributed to the authorized capitals of other banks (account 60201).
The value obtained as a result of this calculation will be the absolute amount of the bank’s equity capital.
When calculating the amount of risk-weighted assets, the latter are divided into five groups based on the degree of investment risk and the possible loss of part of the value. Asset weighting is done by multiplying the balances in the relevant balance sheet account(s) or part thereof by the risk factor (in %) divided by 100%. The resulting amount of risk-weighted assets is increased by the amount of credit risk for instruments reflected in off-balance sheet accounts, the amount of credit risk for forward transactions and the amount of market risk. To determine the credit risk for instruments reflected in off-balance sheet accounts, the nominal amount of liabilities for each financial instrument is multiplied by the risk coefficient. Risk assets are increased by the amount received.
To calculate the credit risk for futures transactions (except for transactions concluded on trading platforms of countries included in the “group of developed countries”, for which credit risk is not calculated), the current credit and potential risks are determined* The current credit risk represents the sum of the replacement cost of transactions, included in bilateral offset agreements (netting and similar agreements) and replacement costs for transactions not included in offset agreements.
Potential credit risk is determined as the amount of risk for transactions with legally formalized bilateral compensation agreements and for transactions not included in these agreements
The total amount of risk for forward transactions (FRT) is determined as the difference between the amount of current and potential risk and the amount of collateral received by the bank from the counterparty. The resulting value is multiplied by the risk coefficient depending on the counterparty and amounts to the amount of credit risk for forward transactions, taken into account when calculating capital adequacy.
The amount of market risk is calculated in accordance with the Regulation of the Central Bank of the Russian Federation No. 89-P dated September 24, 1999.
Thus, the capital adequacy ratio is calculated using the following formula:
The Russian methodology for determining bank capital and calculating its adequacy had significant differences from the recommendations of the Basel Committee. Firstly, the bank’s capital included all profits from the previous and current year without taking into account its intended purpose, which led to an overstatement of the amount of capital. Secondly, when calculating risk-weighted assets, risk coefficients for corporate securities are reduced. This situation continues to this day. The listed differences are eliminated to some extent by the Regulations “On the methodology for calculating equity (capital)
credit institutions", which provides for the division of capital into two levels, main and additional, and clarifies the calculation of the amount of profit and funds included in the bank’s capital.
The bank's fixed capital includes the following elements:
- authorized capital of a credit institution;
- share premium,
- the value of the property received free of charge;
- part of the funds of a credit organization (reserve, savings), formed in accordance with the requirements of legislative and regulatory documents and in the manner established by the constituent documents of the credit organization, at the expense of the profits of previous years, the use of which does not lead to a decrease in the bank’s property;
- part of the unused profit of the current year and funds formed from the profit of the current year, if these data are confirmed by an audit firm,
- the amount of the reserve created by a credit institution for the depreciation of investments in shares and shares of subsidiaries and dependent companies, in shares of banks (for investment and resale), as well as in other shares and shares of non-resident banks.
The bank's fixed capital is reduced by the amount:
- intangible assets adjusted by the amount of accrued depreciation;
- own shares and shares purchased by a credit institution;
- uncovered losses from previous years;
- current year losses
Additional capital includes:
- increase in the value of property due to revaluation made before January 1, 1997;
- reserves for possible losses on loans classified as risk group 1;
- funds of a credit institution formed from the profit of the current year, without confirmation by an audit firm, and from the profit of previous years before confirmation by an audit firm, the use of which does not lead to a decrease in the bank’s property;
- retained earnings of the reporting year, taking into account accrued interest on loans classified as risk group 1, not confirmed by an audit firm and not included in fixed capital;
- subordinated loan (loan), which means a loan received by a bank in rubles for a period of at least 5 years, subject to the following conditions: the loan cannot be repaid earlier than the due date (except for significant violations of the agreement by the borrower or for other reasons); repaid in one amount at the end of the term, interest is set at the refinancing rate; upon liquidation of the borrower bank, the creditor's claims for the provided subordinated loan are satisfied after the requirements of other creditors are satisfied, but before payments are made on shares or shares of bank participants. The amount of the subordinated loan should not exceed 50% of the fixed capital;
- part of the authorized capital formed by capitalizing the increase in the value of property during revaluation,
- preferred shares, except for those for which a fixed dividend is not established and not classified as cumulative;
- unused profit of the previous year before audit confirmation (before July 1 of the current year).
The amount of additional capital obtained in this way is taken into account in calculating the total capital within the limits of the amount of fixed capital. If the fixed capital is zero or has a negative value, then additional capital is not taken into account.
By summing up the calculated amounts of fixed and additional capital, we obtain the absolute value of total capital. To make a final assessment of the volume of total capital, it must be reduced in the same order as indicated when calculating the capital adequacy ratio. In addition to the previously mentioned elements, the bank's capital is reduced by the amount of the subordinated loan provided to resident credit institutions in the part that the latter take into account as sources of additional capital.
Thus, the refined methodology for calculating bank capital and its division into main and additional capital brings the assessment of capital closer to the standards accepted in international practice.
One of the key parameters for assessing the stability of banks is the capital adequacy ratio (N1).
Bank's own funds (capital) adequacy ratio (H1) regulates (limites) the risk of bank insolvency and determines the requirements for the minimum amount of the bank’s own funds (capital) necessary to cover credit, operational and market risks. The N1 standard is defined as the ratio of the size of the bank's own funds (capital) and the amount of its assets, weighted by risk level.
K – bank’s own capital;
K Pi – risk coefficient of the i-th asset;
A i – bank’s i-th asset;
P Ki – the amount of the reserve for possible losses on loans of the i-th asset;
KRV – the amount of credit risk for contingent liabilities;
KRS – the amount of credit risk for term obligations;
РР – value of market risk.
The numerical value of the bank's capital adequacy ratio:
For banks with equity capital of at least 5 million euros - at least 10%.
For banks with equity capital of less than 5 million euros - no less than 11%.
The revocation of the banking license threatens the bank if the N 1 standard has dropped to 2%.
Despite the insignificant share in the resources of a commercial bank, its own capital performs a number of vital functions:
Protective: Due to its permanent nature, equity capital acts as the “main means of protecting” the interests of depositors and creditors, from whose funds a significant share of the bank’s assets is financed. Those. SC - the value within which the bank
Operational: Throughout the entire period of operation of the bank, its own capital is the main source of formation and development of the bank’s material base, providing conditions for its organizational growth
Regulatory: The insurance company is designed to protect a commercial bank from financial instability and excessive risks
12. Foreign analogues for assessing bank capital adequacy.
To register a bank, it is necessary to ensure the minimum required amount of authorized capital and maintain established capital adequacy standards throughout the entire period of activity. In banking practice, there are different methods for determining capital adequacy.
Leverage method consists in establishing a standard ratio of the bank’s own and borrowed funds. For example, if the ratio is set to 5%, this means that the bank's borrowed funds cannot exceed the capital by more than 20 times. Until 1998, the NBU used this method to calculate the estimated indicator of bank capital adequacy. In the United States in 1983, the ratio of equity capital to borrowed funds was 3%. The leverage method has the following disadvantages:
There is no differentiation between different types of capital;
The risk level of active operations is not taken into account;
Off-balance sheet liabilities and the risk associated with them are not taken into account.
In modern banking practice, this method of determining capital adequacy can be used as an auxiliary method in parallel with other methods.
Method of comparative analysis of indicators. This method uses the following indicators to assess capital adequacy:
ratio of capital to total assets of the bank;
Ratio of capital to total deposit liabilities;
The ratio of capital to risky assets, calculated as the sum of all assets other than cash and government securities.
The values of the indicators are constantly monitored and analyzed by regulatory authorities, but standards or limits are not established. In the process of supervision, techniques of structural, comparative and dynamic analysis are used. The indicators of a particular bank are compared with similar values of other banks or with the industry average. Dynamic analysis is designed to identify trends in changes in the amount of capital of the same bank over a certain period of time.
The disadvantages of the method of comparative analysis of capital adequacy indicators are the subjective nature of assessments and conclusions, the lack of generally accepted standards of capital adequacy, and significant labor intensity.
Expert assessment method. Expert assessments of capital adequacy are based on the use of expert conclusions about the quality of bank management, the level of profitability and liquidity, the dynamics of the deposit base, the structure of the balance sheet, the riskiness of active operations, and the regional characteristics of the market in which the bank operates. The method involves studying the activities of each bank in the context of specific market conditions and taking into account the relationship of external and internal factors. If market conditions are characterized by increased riskiness or weakness of internal structures is identified, then the bank may be required to increase capital above the minimum level.
The method of expert assessments can be successfully used to assess the adequacy of the capital of individual banks, but given the significant size of the country's banking system and the diversity of markets for its application, it becomes problematic.
Capital adequacy ratio ( Cook's coefficient) 1988:
OK(UK, Non-distributed profit, Open reserves) ≥ Additional(Revalued reserves, Reserves for credit risks, Subordinated instruments)
The fixed capital must be at least 50% of the additional capital
Calculation of capital adequacy ratio
Alternative approaches to calculating minimum capital levels in relation to credit risk:
A). Standard approach based on the methodology of the 1988 Basel Capital Accord. B). Approach based on internal ratings, according to which the amount of capital. calculated by banks based on their own estimates.
3.3. Assessing the bank's equity capital adequacy
The problem of determining bank capital adequacy has long been the subject of scientific research and debate between banks and regulatory authorities. Banks prefer to make do with a minimum of capital in order to increase profitability and asset growth; bank controllers require large amounts of capital to reduce the risk of bankruptcy. At the same time, it is argued that bankruptcies are caused by poor management, and that well-managed banks can exist with low capital standards.
The term "capital adequacy" reflects the overall assessment of the bank's reliability and the degree of its exposure to risk. Treating capital as a “buffer” against losses creates an inverse relationship between the amount of capital and the bank’s exposure to risk. This implies the basic principle of adequacy: the size of equity capital must correspond to the size of assets, taking into account the degree of their risk. At the same time, commercial banks always take into account in their work that excessive “capitalization” of the bank, the issue of an excessive number of shares
Compared to the optimal need for own funds, it is also not a good thing. It negatively affects the bank's performance. Mobilizing monetary resources by issuing shares is an expensive and often undesirable method of financing for a bank compared to attracting third-party funds. Therefore, bank managers, on the one hand, and bank supervisory authorities, on the other, strive to find the optimal balance between the amount of capital and other parameters of the activities of a commercial bank.
The underestimated share of capital in the bank's resources has been criticized. We are talking about the disproportionate responsibility of the bank and its depositors (or the state - under the deposit insurance system). A bank's liability is limited to its capital, and depositors and other creditors risk a much larger amount of funds entrusted to the bank. There are also a number of factors that determine the requirements for increasing bank capital: a) the market value of bank assets is more volatile than that of industrial enterprises - it changes with changes in interest rates, with the deterioration of the creditworthiness of borrowers; b) the bank relies more on non-permanent sources of short-term debt, many of which can be withdrawn on demand. Therefore, any political or economic event can provoke a massive outflow of bank resources. It is known that at the turn of the century the ratio of capital to assets averaged 20% for banks, but today it is only close to 8%. That is, the solvency risk of the banking system has increased over time because asset quality has not improved enough to compensate for the lower share of capital.
The fact that the adequacy of bank capital determines public confidence in a particular commercial bank and the banking system as a whole puts it among the indicators under the control of the state represented by the central bank. Maintaining a sufficient level of total capital is one of the conditions for the stability of the banking system.
It is difficult to determine exactly the amount of capital that a bank or the banking system as a whole should have, but it must be sufficient to perform the functions already discussed, the confidence of depositors and regulatory authorities. The amount of capital required depends on the risk taken by the bank. If, for example, the loans provided by the bank involve greater risk, more capital funds are required. When determining the amount of capital required, the bank faces an alternative: increase its capital as risk increases or invest in assets that do not involve increased risk. Thus, whether a bank's capital is adequate or not depends on the quality of its assets, quality of management, operating policies and the amount of risk the bank bears.
For a long time, commercial banks and society have sought to develop a system of standards that could be applied when checking the capital adequacy of a bank or the banking system as a whole.
One of the longest-used ratios is the capital-to-deposit ratio. It was widely used in the United States by the Office of the Comptroller of the Currency back in the early 20th century. It was established that 10% of the amount of deposits in the bank should be covered by capital. The bank is able to pay with its own funds a tenth of the deposits when their mass outflow begins. This indicator is quite simple, and on its basis it is easy to compare banks, which remains its popularity among banking financial services to this day.
In the 40s, this indicator was replaced by another indicator - the ratio of capital to total assets. It was believed that the composition and quality of bank assets are the main cause of bankruptcies; the feasibility of the indicator stemmed from the reflection of losses in the Western banking balance sheet in the form of a decrease in total assets. This ratio indicated what losses the bank could suffer without harm to depositors, and was approximately 8%. Improvement of the indicator led to the introduction of a coefficient - the ratio of capital to risky assets, which offers an objective assessment of the size of the reduction in the volume of assets. This ratio measures the ratio of total capital to those assets that contain the possibility of loss without attempting to define the loss from any risky asset or category of risky assets. They also proposed coefficients based on excess capital (total capital minus the cost of common shares), since it primarily goes to cover losses, and other indicators.
The issue of methodology for assessing bank capital became the subject of discussion in international financial organizations (Bank for International Settlements) in the second half of the 80s. The goal was to develop general capital adequacy criteria acceptable to banks regardless of their country of origin. In July 1988, under the auspices of the Basel Committee on Banking Regulation and Supervision, the “Agreement on the International Harmonization of Capital Calculation and Capital Standards” was concluded, which introduced the adequacy standard, usually called the “Cook's ratio”. It came into force in 1993 and is currently used as a benchmark by the central banks of many countries. The peculiarity of this standard is that it applies only to international banks, i.e. having branches, subsidiaries or joint banks abroad.
The Cook's ratio sets the minimum ratio between a bank's capital and its on- and off-balance-sheet assets, weighted by risk according to norms that may vary by country, but must follow a certain logic. The coefficient is set at 8% (with core or fixed capital accounting for at least half of this 8%). Own capital includes two elements: core and additional capital. To evaluate them, it is enough
The choice was to weight assets and off-balance sheet liabilities (rather than use the balance sheet total). This approach ensures the inclusion of off-balance sheet transactions and encourages investment in low-risk assets.
Essentially, the Basel Accord standardized the assessment of credit and country risks. Interest rate and market risk were not managed under this methodology until 1997.
Currently, the Basel Committee has developed recommendations for calculating the capital adequacy ratio taking into account interest rate and market risks.
Depending on the risk assessment, assets are weighed. The greatest difficulties are caused by the assessment of transactions taken into account off the balance sheet. This is due to their diversity in each country and sometimes insignificant volume. Each country has some latitude in interpreting risk and applying the Basel Committee recommendations, but the recommendations insist on converting all off-balance sheet liabilities into equivalent credit risk using a specific conversion factor. The results obtained are then weighted in the same way as in the case of balance sheet transactions. This does not allow many banks to use the practice of removing risky types of assets from their balance sheets by introducing new financial instruments. Thus, a uniform assessment of the total risk across all bank assets is carried out.
The Basel system has become increasingly widespread. Thus, within the EU there is a single solvency ratio, similar to the Cook coefficient, but applicable to the entire system of credit institutions, and not just to large international banks.
The development of a holistic approach to assessing equity capital adequacy is especially important for the modern Russian banking system. Commercial banks in our country operate under increasingly unfavorable conditions. Numerous cases of bankruptcy and closure of banks, the lack of a centralized deposit insurance system require careful analysis and statistical research to determine the level of capital adequacy of commercial banks.
In accordance with the Basel Accord, the bank's capital is divided into Tier 1 capital and Tier 2 capital.
Tier 1 (principal) capital includes common stock, non-dividend retained earnings, perpetual preferred stock, and non-controlling interests in consolidated subsidiaries less intangible capital stock.
Banks are allowed to show on their balance sheets the intangible capital stock that arises when they purchase a bank or non-bank firm for cash. New international standards imply that, when determining the minimum required amount of a bank's share capital, its intangible capital must be deducted from its total capital.
Tier 2 capital (additional) includes reserves for general losses on active operations, to cover loan losses, cumulative term preferred shares, subordinated debt.
New international capital standards allow subordinated debt with an original average maturity of 5 years to be considered as the source of the additional capital required.
However, no form of additional capital can constitute more than 50% of the fixed capital. After 1992, allowable reserves for loan and lease losses are also considered part of additional capital, provided they are general (not special) reserves and do not exceed 1.25% of banks' risk-weighted assets.
The components of Tier 2 capital are independently regulated by the signatories to the Basel Accord; in this case, the 2nd level capital cannot be more than 100% of the 1st level capital.
The provisions included in Tier 2 capital for the event of loan defaults have been limited since 1992 to 1.25% of risk-weighted assets, and the total amount of secondary debt and medium-term preferred shares that are subject to amortization at maturity cannot exceed 50% of Tier 1 capital. Other components of Tier 2 capital have no restrictions, and all amounts exceeding the established standards are permissible, but are not counted as capital.
The new harmonized capital requirements, which were to come into effect before 31 December 1992, were:
The ratio of Tier 1 capital to risk-weighted assets and off-balance sheet transactions must be no less than 4%.
The ratio of total capital (i.e. the sum of Tier 1 and Tier 2 capital) to total risk-weighted assets and off-balance sheet transactions must be at least 8%.
The agreement also provided for a transition period (1990-1992), during which these indicators were to be 3.65 and 7.25%, respectively.
The approach to determining capital adequacy proposed by the Basel Committee has the following main advantages:
characterizes the “real” capital of the bank;
promotes a review of banks' strategy and a refusal to excessively increase loans with minimal capital, giving preference not to the volume of the loan portfolio, but to its quality;
helps to increase the share of non-risk activities of the bank;
encourages the government to reduce regulation of banking activities, since it shows more elements of self-regulation,
makes it possible to take into account risks related to off-balance sheet obligations;
allows you to compare banking systems of different countries.
However, it should be noted that, along with the advantages of the proposed method for calculating bank capital adequacy, it has a number of significant disadvantages. The main ones are:
lack of sufficient clarity in defining the constituent elements of capital by level, which makes it possible to soften capital requirements on the part of individual banks,
insufficiently detailed differentiation of assets by risk level;
underestimation of reserve requirements for certain types of operations;
focus on assessing capital adequacy only for credit risk,
absence of dependence of the amount of capital on market and interest rate risks, which are very important in the bank’s activities.
In order to clarify the calculation of bank capital adequacy taking into account interest rate and market risks, amendments to the Agreement on Capital Requirements were adopted in July 1997. In accordance with these amendments, within the time limits established by banking supervisors, banks will be required to measure and make capital charges , adjusting it for market risks in addition to credit risks. Market risk is the risk of losses on balance sheet and off-balance sheet positions caused by changes in market price levels.
This requirement applies to the following types of risks:
risks associated with interest rate-based and equity instruments in the trading portfolio;
currency and commodity risks (purchase and sale of securities) for all bank operations.
Tier 1 and Tier 2 capital can be used primarily to cover market risk. At the discretion of national authorities, banks may use Tier 3 capital, which consists of short-term subordinated debt (at least 2 years), subject to the following conditions:
banks can use Tier 3 capital only to support market risk caused by changes in market price levels. This means that any capital requirements arising from credit or counterparty risk under the terms of the 1988 Capital Adequacy Agreement, including counterparty risk that arises from the use of derivatives in a trading and banking book, must be met under the terms of that agreement (i.e. covered by Tier 1 and Tier 2 capital);
Tier 3 capital required to support market risk should be no more than 250% of Tier 1 capital. Tier 3 capital can be short-term subordinated debt, which should be considered as capital, provided that the latter, if circumstances so require, can become part of the bank's permanent capital and be used to cover losses in the event of its insolvency.
Therefore, at a minimum it should be:
unsecured, subordinated and fully paid,
have an initial term of at least 2 years,
must not be repaid before the original due date, unless permitted by the supervisory authorities,
there must be a capital lock-in clause, which states that neither interest payments nor principal can be paid (even at maturity) if such payments would put the bank in breach of its minimum capital requirements.
In domestic practice, the procedure for calculating the capital adequacy ratio for commercial banks is established by the relevant documents of the Central Bank of the Russian Federation. The main ones are Instruction of the Central Bank of Russia dated October 1, 1997 No. 1 “On the procedure for regulating the activities of banks” and Regulations of the Central Bank of the Russian Federation dated June 1, 1998 No. 31-P “On the methodology for calculating the own funds (capital) of credit organizations” with their subsequent changes and additions. The listed regulatory documents establish the minimum amount of authorized capital for newly created credit institutions, the minimum amount of equity capital for existing credit institutions, the general procedure for calculating the absolute and relative amount of capital and its distribution into main and additional capital in accordance with the recommendations of the Basel Committee.
It should be noted that the Central Bank of the Russian Federation continues to tighten the requirements for the absolute and relative amount of capital, bringing them into line with international standards.
The minimum amount of authorized capital for newly created credit institutions should be:
01.01.98 - an amount equivalent to 4.0 million ECU;
07/01/98 - 5.0 million ECU.
The minimum amount of bank equity capital, defined as the sum of the authorized capital, bank funds and retained earnings, is established from January 1, 1999 in an amount equivalent to 5.0 million euros. Banks whose equity capital will be within amounts equivalent to EUR 1.0 million to EUR 5.0 million will be subject to restrictions on certain transactions. In particular, these banks will not be able to conduct operations outside the Russian Federation (except for opening and maintaining correspondent accounts in non-resident banks to carry out settlements on behalf of individuals and legal entities), operations to attract and place precious metals; open branches and create subsidiaries abroad; participate in the capital of credit organizations in an amount exceeding 25% of the capital of these credit organizations.
The calculation of the bank's capital adequacy ratio is carried out in the following sequence. Initially, the absolute value of capital is determined; then the amount of risk-weighted assets and the reserves created by the bank to cover possible losses on active operations are calculated.
When calculating the absolute value of equity capital, the following elements are accepted:
Sum of balances on balance sheet accounts:
1. Bank funds - authorized capital (account 102 + account 103 + account 104); additional capital (account 106); funds (account 107).
Balances on balance sheet account 104 (authorized capital of non-joint-stock banks) are taken into account in the amount of actually paid authorized capital, but not higher than the registered one.
2. Current income of the bank (account 701), reduced by the current expenses of the bank (account 702).
3. Future income in the form of positive differences on individual bank operations (accumulated interest (coupon) income received in advance on interest (coupon) obligations - account 61305; revaluation of funds in foreign currency - account 61306; revaluation of securities - account 61307; revaluation of precious metals - account 61308) minus negative differences on the same bank transactions (accounts 61405 + 61406 + 61407 + 61408).
4. Retained earnings of the bank minus losses of the current and previous years (accounts 703 - 704 - 705).
5. Reserves for possible loan losses created for loans of the 1st risk group (according to the bank’s analytical accounting data).
6. Reserves for impairment of investments in securities:
in shares of subsidiaries and affiliated joint-stock companies (account 60105);
in bank shares acquired for resale and investment (analytical accounting data for account 50804);
into other shares, shares of non-resident banks and other shares of non-residents (analytical accounting data for accounts 50904, 51004, 51104).
The bank's capital is reduced by the amount:
shares and shares purchased by joint-stock and non-joint-stock banks (account 105);
diverted funds for settlements with bank organizations for allocated funds (account 60319);
accrued but not paid by the bank on time (overdue) interest (part of account 61401);
loans, guarantees and sureties provided by the bank to its participants (shareholders) and insiders in excess of the limits established by the risk standards per borrower and the maximum amount of loans, borrowings, guarantees and sureties provided by the bank to its insiders;
under-created reserves for possible loan losses and for depreciation of investments in securities (the difference between the estimated amount of reserves required by the regulations of the Central Bank of the Russian Federation and the actual amount of reserves created), with the exception of the amount of under-created reserve for the amount of loans provided to participants (shareholders ) bank and insiders;
balances on account 10601 “Increase in the value of property during revaluation”, exceeding the amount of revaluation of bank property carried out before January 1, 1997;
overdue receivables lasting more than 30 days from the moment they were recorded in the corresponding balance sheet accounts (analytical accounting data for accounts receivable accounting);
the excess of investments in tangible and intangible assets over the sources of their financing. To make such an adjustment to the bank's capital, it is necessary to make a preliminary calculation. The sum of debit balances of accounts for accounting for tangible and intangible assets (604 + 605 + 607 - 606 + 609 (A-P) + 610) is compared with the sum of balances of passive accounts (102+ 103+ 104-105 + 106 + 107 +(701 -- 702) + (703 - 704 - 705). If the sum of sources is higher than the sum of investments in tangible and intangible assets, then the positive result is not taken into account. If investments in tangible and intangible assets exceed the sources (negative result), then the bank's capital. is reduced by the entire amount of debit balances on the above accounts, reduced by the amount of depreciation;
the bank's investments in shares (participation interests) of other banks and business entities, including non-resident credit organizations acquired for investment, if the block of shares (participation) exceeds 20% of the authorized capital of the issuing organization, as of the date of calculation of the bank's capital (analytical accounting data for the accounts 50903, 51003, 51103,60202,60203,60204);
shares of banks acquired for resale (account 50802) and investment (account 50803);
participation in subsidiaries and dependent joint stock companies (account 601 A);
bank funds contributed to the authorized capitals of other banks (account 60201).
The value obtained as a result of this calculation will be the absolute amount of the bank’s equity capital.
When calculating the amount of risk-weighted assets, the latter are divided into five groups based on the degree of investment risk and the possible loss of part of the value. Asset weighting is done by multiplying the balances in the relevant balance sheet account(s) or part thereof by the risk factor (in %) divided by 100%. The resulting amount of risk-weighted assets is increased by the amount of credit risk for instruments reflected in off-balance sheet accounts, the amount of credit risk for forward transactions and the amount of market risk. To determine the credit risk for instruments reflected in off-balance sheet accounts, the nominal amount of liabilities for each financial instrument is multiplied by the risk coefficient. Risk assets are increased by the amount received.
To calculate the credit risk for futures transactions (except for transactions concluded on trading platforms of countries included in the “group of developed countries”, for which credit risk is not calculated), the current credit and potential risks are determined* The current credit risk represents the sum of the replacement cost of transactions, included in bilateral offset agreements (netting and similar agreements) and replacement costs for transactions not included in offset agreements.
Potential credit risk is determined as the amount of risk for transactions with legally formalized bilateral compensation agreements and for transactions not included in these agreements
The total amount of risk for forward transactions (FRT) is determined as the difference between the amount of current and potential risk and the amount of collateral received by the bank from the counterparty. The resulting value is multiplied by the risk coefficient depending on the counterparty and amounts to the amount of credit risk for forward transactions, taken into account when calculating capital adequacy.
The amount of market risk is calculated in accordance with the Regulation of the Central Bank of the Russian Federation No. 89-P dated September 24, 1999.
Thus, the capital adequacy ratio is calculated using the following formula:
The Russian methodology for determining bank capital and calculating its adequacy had significant differences from the recommendations of the Basel Committee. Firstly, the bank’s capital included all profits from the previous and current year without taking into account its intended purpose, which led to an overstatement of the amount of capital. Secondly, when calculating risk-weighted assets, risk coefficients for corporate securities are reduced. This situation continues to this day. The listed differences are eliminated to some extent by the Regulations “On the methodology for calculating equity (capital)
credit institutions", which provides for the division of capital into two levels, main and additional, and clarifies the calculation of the amount of profit and funds included in the bank’s capital.
The bank's fixed capital includes the following elements:
Authorized capital of a credit institution;
Share premium,
The value of the property received free of charge;
Part of the funds of a credit organization (reserve, savings), formed in accordance with the requirements of legislative and regulatory documents and in the manner established by the constituent documents of the credit organization, at the expense of the profits of previous years, the use of which does not lead to a decrease in the bank’s property;
Part of the unused profit of the current year and funds formed from the profit of the current year, if these data are confirmed by an audit firm,
The amount of the reserve created by a credit institution for the depreciation of investments in shares and shares of subsidiaries and dependent companies, in shares of banks (for investment and resale), as well as in other shares and shares of non-resident banks.
The bank's fixed capital is reduced by the amount:
Intangible assets adjusted by the amount of accrued depreciation;
Own shares and shares purchased by a credit institution;
Uncovered losses from previous years;
Current year losses
Additional capital includes:
Reserves for possible losses on loans classified as risk group 1;
Funds of a credit institution formed from the current year’s profit, without confirmation by an audit firm, and from the profit of previous years before confirmation by an audit firm, the use of which does not lead to a decrease in the bank’s property;
Retained earnings of the reporting year, taking into account accrued interest on loans classified as risk group 1, not confirmed by an audit firm and not included in fixed capital;
Subordinated loan (loan), which means a loan received by a bank in rubles for a period of at least 5 years, subject to the following conditions: the loan cannot be repaid earlier than the due date (except for significant violations of the agreement by the borrower or for other reasons); repaid in one amount at the end of the term, interest is set at the refinancing rate; upon liquidation of the borrower bank, the creditor's claims for the provided subordinated loan are satisfied after the requirements of other creditors are satisfied, but before payments are made on shares or shares of bank participants. The amount of the subordinated loan should not exceed 50% of the fixed capital;
Part of the authorized capital formed by capitalizing the increase in the value of property during revaluation,
Preferred shares, except for those for which a fixed dividend is not established and not classified as cumulative;
Unused profit of the previous year before audit confirmation (before July 1 of the current year).
The amount of additional capital obtained in this way is taken into account in calculating the total capital within the limits of the amount of fixed capital. If the fixed capital is zero or has a negative value, then additional capital is not taken into account.
By summing up the calculated amounts of fixed and additional capital, we obtain the absolute value of total capital. To make a final assessment of the volume of total capital, it must be reduced in the same order as indicated when calculating the capital adequacy ratio. In addition to the previously mentioned elements, the bank's capital is reduced by the amount of the subordinated loan provided to resident credit institutions in the part that the latter take into account as sources of additional capital.
Thus, the refined methodology for calculating bank capital and its division into main and additional capital brings the assessment of capital closer to the standards accepted in international practice.
5.2. CALCULATION AND ANALYSIS OF THE BANK'S CAPITAL ADEQUACY AND MAXIMUM RISK AMOUNT
To ensure economic conditions for sustainable financing of the country's banking system, the Central Bank of the Russian Federation established the following mandatory economic standards for the activities of commercial banks:
- capital adequacy standards for a commercial bank;
- liquidity standards for the balance sheet of a commercial bank (see section 5.4);
- the minimum amount of required reserves deposited with the Central Bank (see section 4.5);
- maximum risk per borrower, etc.
In addition to the bank balance sheet, personal accounts and other forms of accounting, reports in forms No. 1 (standard) and No. 2 (standard) are used as sources of information for analyzing compliance with standards. Form No. 1 contains information on compliance with economic standards by a commercial bank, reflects the reasons for violation of standards, provides information on maximum and “large” loans (in terms of borrowers, their loan debt, available guarantees, sureties and types of collateral, the size of the risk). Form No. 2 provides a breakdown of individual balance sheet accounts, the balances of which are used in calculating standards.
| ∑ K rkr |
| TO |
where ∑ Кркр is the total amount of large loans issued by the bank (code 8998).
It should be borne in mind that a loan is considered large if the total amount of risk-weighted claims against one borrower (group of borrowers) of the bank for loans, taking into account 50% of the amounts of off-balance sheet claims (guarantees, sureties) the bank has in relation to one borrower (borrowers) exceeds 5% of the bank's capital. The decision to issue large loans must be made by the board of the bank or its credit committee, taking into account the conclusion of the bank’s credit department. The decision to extradite must be documented in the appropriate document.
The Central Bank of the Russian Federation has established that the total amount of large loans and borrowings issued by the bank to borrowers, including interrelated ones, taking into account 50% of off-balance sheet claims (guarantees, guarantees) cannot exceed the size of the bank's capital by more than 10 (1997) and 8 (1998) .) once.
3. Maximum risk per creditor (H8). This standard is established as a percentage of the amount of the deposit or loan received, the received guarantees and sureties of the bank, the account balances of one or related creditors (depositors) and the bank’s own funds:
100%where О incl - the total amount of the bank's liabilities in rubles, foreign currency, precious metals for deposits, received loans, guarantees and sureties (50%) and balances on settlement and current accounts for transactions with securities of one or more related creditors (depositors).
This standard can also be determined by the total amount of liabilities of another credit institution acting as a creditor (depositor) in relation to this bank.
The maximum permissible value of the normative N8 is set at 25% of the balance as of 02/1/98.
4. Maximum risk per borrower-shareholder (participant) of the bank(H9) is determined by the formula:
| K ra |
| TO |
where K pa is the total amount of all claims of the bank (including off-balance sheet claims) taking into account the risk and claims of the bank in rubles, foreign currency and precious metals in relation to its shareholder (participant). The maximum permissible value of the N9 standard is set at 20% of the balance as of January 1, 1997.
It should be borne in mind that the total amount of loans and borrowings issued to shareholders (shareholders) of the bank, from January 1, 1998, cannot exceed 50% of the bank’s own funds (capital).
5. The maximum amount of loans and borrowings, guarantees and sureties provided by the bank to its insiders (NY).
The maximum amount of risk per insider can be determined by the formula
| K ri |
| TO |
where K ri is the total amount of claims (including off-balance sheet claims - 50% of guarantees and guarantees) of the bank against the bank insider and related persons. In accordance with international practice, the category of insiders includes individuals: shareholders with more than 5% of shares, directors (presidents, chairmen and their deputies), members of the board, members of the credit council (committee), heads of subsidiaries and parent structures and other persons who The decision to issue a loan may also be influenced by relatives of insiders, former insiders and other persons participating in third-party structures in which insiders also participate.
The maximum permissible value of NI per one insider and a person associated with him is set at 2% of the balance as of July 1, 1997. At the same time, the total amount of loans and borrowings issued to insiders, starting from the balance sheet as of July 1, 1997. cannot exceed 3% of the bank’s own funds (capital).
6. Risk standard for own bill obligations (N13). To calculate this standard, the formula is used
| IN |
| TO |
where VO - bills of exchange and bankers' acceptances issued by credit institutions (account 523), as well as 50% of the credit institution's off-balance sheet obligations from the endorsement of bills, avals and bill intermediation, off-balance sheet account 91404 (code 8960).
One of the assessment indicators of a bank’s performance is the adequacy of equity capital, which is calculated in the form of various ratios. The significance of this indicator is that the role of equity capital in banking is quite specific and this is manifested through the implementation of certain functions, which were noted above. The economic meaning of equity capital adequacy indicators is that its absolute value does not sufficiently reflect the true position of the bank in terms of compliance with the acceptable degree of risk in attracting funds from creditors and depositors. This means that banks prefer to attract free resources from clients, while investing a minimum of their own funds. In the event of certain negative phenomena associated with a violation of the return of placed funds, the bank may suffer large losses, which, if there is a lack of equity capital, can cause the bank to go bankrupt.
Thus, the absolute value of equity capital does not characterize the degree of reliability of the bank, since it does not reflect the full picture of the acceptable banking risk for the bank’s creditors and depositors. In this case, it is necessary to take into account how much equity capital corresponds to the size of bank assets. On the other hand, the amount of equity capital cannot increase indefinitely; there are so-called optimality sizes. The optimality of the bank's equity capital is associated with a real need that allows it to perform the functions of protection against increased risks of banking activities. Replenishing equity capital by issuing additional shares is a rather expensive method of financing compared to attracting free funds from third-party organizations and the public. The optimal ratio of the bank's equity capital compared to assets and borrowed funds should be adequate to the degree of risk experienced by the bank and its clients.
It is impossible to give an unambiguous answer to the question of what the bank’s equity capital should be, since each bank takes on a certain degree of risk that it is capable of. However, only the desire of the bank is not enough when deciding the amount of equity capital. The bank must replenish its own capital with the growth of assets and, accordingly, the risk of banking operations to raise funds. In fact, his actions to replenish his own capital may be postponed until better times and, as a result, lead to financial difficulties and even bankruptcy. It is clear that the difficulties of one bank cannot but affect the system as a whole, therefore, concern for maintaining the adequacy of the bank’s equity capital is not a matter for one bank, but for the entire banking system as a whole. The requirement to maintain adequacy of equity capital is one of the rules for regulating the activities of banks by the state.
The current state of the equity capital of Kazakhstan banks is characterized by various volumes, which can be seen from the data posted by the FSA. These data illustrate the significant dispersion of equity capital and serve as confirmation that absolute indicators do not allow us to evaluate and compare different banks. Therefore, to assess the adequacy of equity capital, standards in the form of relative indicators - various ratios - were initially used.
In the world practice of assessing the activities of commercial banks, as a rule, indicators are used that characterize the ratio of the amount of equity capital to deposits or to the bank’s assets. Using these calculated indicators, it is possible to compare the adequacy of a bank’s own bank with the optimal ratio, which is established by the authorized body.
A generally accepted indicator in world practice is the indicator of equity capital adequacy, calculated in relation to the bank’s assets, and to that part of them that is subject to a certain degree of risk. The methodology for calculating bank capital adequacy indicators was developed over several decades and as a result, at the international level in July 1988, under the auspices of the Basel Committee on Banking Regulation and Supervision, the “Agreement on the International Unification of Capital Calculation and Capital Standards” was concluded, according to which the the standard of capital adequacy, called the “Cook coefficient”. This agreement came into force in 1993. Central banks of various countries, including Kazakhstan, currently use this indicator as the base for second-tier banks. Let us next consider the methodology for assessing equity capital adequacy used in Kazakhstan in more detail.
In the “Instructions on standard values and methods for calculating prudential standards for second-tier banks”, approved by the Resolution of the Board of the Agency of the Republic of Kazakhstan for Regulation and Supervision of the Financial Market and Financial Organizations (hereinafter referred to as the FSA) dated September 30, 2005 No. 358, it is established that as Prudential standards regulating the amount of the bank's own capital use the minimum amount of the bank's authorized capital, as well as the equity capital adequacy ratio.
The minimum amount of the bank's authorized capital, as noted earlier, was established by Resolution of the Board of the National Bank of the Republic of Kazakhstan dated June 2, 2001 N 190, subsequently supplemented by the relevant regulations of the FSA.
To calculate the equity capital adequacy ratio, the methodology recommended by the 1988 Basel Agreement is used.
The adequacy of the bank's own capital is characterized by two coefficients – k1 and k2.
The size of the SKB is necessary to calculate the k2 coefficient; first-tier capital (KII) is used to calculate k1. Before showing the formula for calculating the coefficients k1 and k2, it is necessary to clarify the composition of the value of assets with which the value of SBC and KI is correlated.
To calculate k1, the sum of the bank's assets (AB) is taken into account, and to calculate k2 - the sum of assets, contingent and possible liabilities, weighted by the degree of credit risk (ADR).
The calculation of assets, contingent and possible liabilities, weighted by the degree of credit risk, is carried out in accordance with Applications 1 And 2 to the “Instructions on standard values and methods for calculating prudential standards for second-tier banks.”
The value of the bank's equity adequacy ratio k2 must be at least 0.12.
For a bank in which a bank holding company is a participant, the value of the bank's equity adequacy ratio k2 must be at least 0.10.
The economic meaning of the equity capital adequacy ratio, namely k2, is that the amount of equity capital must be maintained in such an amount that its value in relation to risky assets is at least 12%.
In addition to adequacy ratios established in the form of prudential standards, authorized bodies may apply additional indicators characterizing the adequacy of banks’ equity capital. Thus, in Kazakhstan, the Agency for Regulation and Supervision of the Financial Market and Financial Organizations calculates and publishes, in addition to k1 and k2, indicators characterizing the ratio of equity capital to:
Loan portfolio;
Formed provisions;
Doubtful loans;
Bad loans.
3.4 Raised funds from a commercial bank
In the total amount of banking resources, attracted resources occupy a predominant place - up to 90%, as noted above. The attracted resources of a commercial bank include funds contributed to the bank by clients in the form of deposits, as well as received by the bank in the form of loans or by selling its own debt obligations on the money market. In world practice, all banking resources are usually divided into deposits and non-deposit attracted (borrowed) funds - all together this constitutes the total liabilities of the bank.
The predominance of deposits in the total volume of attracted resources is a characteristic phenomenon for the banking system of developed countries. In modern banking practice, a wide variety of deposits, deposits and deposit accounts are used. The process of constant expansion of the types of deposits is the result of the activities of banks in conditions of fierce competition and the desire of banks to create the most profitable and attractive conditions for clients.
Deposits are classified according to various criteria. By subject they are divided into deposits of legal entities and individuals. According to their economic content, they can be divided into the following groups:
Demand deposits;
Time and savings deposits;
Conditional deposits.
In addition, you can divide all deposits by maturity, type of currency, conditions for depositing, replenishing and withdrawing funds, size and type of interest rate and other conditions.
Demand deposits are funds in various accounts from which owners can receive funds on demand by issuing cash and settlement documents. This type includes current accounts, as well as customer card accounts. The mode of operation of these accounts allows for the smooth transfer and receipt of funds, thus ensuring high liquidity of these funds for their owners. However, as a rule, the bank does not charge any interest on the balance of these accounts. At the same time, the bank does not charge additional fees for servicing demand accounts, limiting itself only to the commission for opening an account.
Current accounts include current accounts - a single account opened to highly reliable clients to record all transactions. In addition, demand deposits usually include funds in correspondent accounts of other banks.
Demand deposits are the cheapest and most accessible type of resource; at the same time, their balance is very flexible and can change at any time. The instability of balances on demand accounts does not allow us to count on their 100% use as credit resources. At the same time, some part, being more or less constant, can be taken into account as sources of credit resources.
The peculiarity of time and savings deposits is characterized by the fact that they are a more stable and stable part of the attracted resources, since they are usually deposited for a fixed period or with an additional condition for withdrawal. The economic meaning of these deposits is to mobilize free funds of various economic entities for their further placement by banks in order to obtain banking profits. For the depositor, the economic meaning of the deposit is associated with the goal that he pursues. For some investors, a deposit is necessary for temporary storage of funds, for others - to accumulate a certain amount, for others - to receive additional income, etc.
The longer the deposit term, the more opportunities for bank lending terms. Therefore, banks are interested in longer-term deposit agreements. At the same time, banks offer different conditions and terms of bank deposits. Thus, in world and domestic practice, storage periods range from 30 days to several years. Depending on the storage period, banks set different interest rates. Interest rates are usually set fixed for the entire deposit period. The exception is cases of early termination of the deposit agreement, when banks provide for a reduction in interest depending on the actual period of storage of funds.
In world practice, savings deposits are distinguished, occupying an intermediate position between time deposits and demand deposits. For them, the interest rate is slightly lower than for urgent ones, since the storage period is not fixed, or only the withdrawal period is limited. At the same time, you are allowed to freely replenish and partially withdraw funds. One of the conditions for savings deposits is the issuance of a savings book to the depositor.
Varieties of savings deposits are deposits with additional contributions, winning, target, etc., as well as NAU accounts used in foreign banks, accounts with automatic clearing of funds and money market cash accounts (MSDR). The general conditions of these deposits are the absence of a fixed storage period, the accrual of interest on the balance, and the ability to carry out settlement transactions in favor of third parties.
In domestic practice, bank deposits are mainly classified as time deposits, which include conditions of storage and withdrawal similar to savings deposits. In addition, there are so-called conditional deposits, for which special conditions for payment are established. Their share, as can be seen from the data in the table above, accounts for a small share.
The deposit policy of commercial banks is discussed in the relevant sections of this textbook, so we do not dwell on the rules and conditions of deposits; we only note that all deposits are formalized by a corresponding agreement between the bank and the depositor in writing. This agreement stipulates all the conditions for storage, replenishment, partial withdrawal, accrual of interest, withdrawal and payment of the deposit.
In world practice, there are a variety of deposits issued in the form of securities - deposit and savings certificates, bank bills. In economic terms, they are similar to time and savings deposits.
Certificates of deposit and savings are a written certificate from the issuing bank about the acceptance of funds, certifying the right of the depositor or his successor to receive funds after a certain period with the payment of an established interest rate. Essentially, certificates are registered securities that can be transferred and gifted to third parties. Certificates of deposit are issued in large amounts and are intended for legal entities, savings - for individuals. The circulation period for certificates can range from several days to several years. Each issue of certificates is accompanied by the establishment of specific conditions for applications and payment of income.
Bank bills are issued to attract borrowed resources. Their peculiarity is that they can be used to pay for goods and services.
Deposits in the form of securities have not yet been developed in domestic banking practice.
In the practice of Kazakh banks, non-deposit attracted resources are quite actively developing, attracted mainly as credit resources in the form of interbank deposits, as well as loans received from other banks and organizations carrying out individual banking operations. These funds are essentially term loans. In addition, Kazakhstani banks attract such funds as:
Loans received from the Government of the Republic of Kazakhstan;
Loans received from international financial organizations;
REPO operations with securities;
Subordinated debts;
Issued securities.
In addition to those discussed, commercial banks can additionally use such methods of attracting resources as discounting bills and obtaining loans from the central bank, as well as loans on the Eurodollar and Eurobond market.
Thus, the main source of financing for the active operations of a commercial bank is attracted resources, which requires the commercial bank to constantly direct its efforts to achieve an effective deposit policy and expand deposit operations, observing the rules for regulating balance sheet liquidity and ensuring a guarantee of the return and safety of customer funds.