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Basel ratios

N

no_name

Member
I've been going through the institutional investors chapter and I've found it a little confusing to follow the Basel solvency ratios. From my understanding, there are the ratios I've listed below. Please could you check that I've not misunderstood / missed any out?

The tiers for all three Basel accords are as follows:
  • Tier 1 is share capital and disclosed reserves (for Basel III there's an additional Common Equity Tier 1)
  • Tier 2 is hidden reserves, unrealised gains on investment securities and medium to long-term subordinated debt
  • Tier 3 is short-term subordinated debt
The required solvency ratios:
  • regulatory capital / risk weighted assets needs to be at least 8%. Here regulatory capital is Tier 1 + Tier 2 + Tier 3 (I think)
  • regulatory capital / risk weighted assets needs to be at least 7% (going up from 2%) for Basel III. Here regulatory capital is Tier 1 + Tier 2 (I think)
  • CET1 ratio must be at least 4.5%
  • leverage ratio = tier 1 capital / total assets needs to be at least 3%
Thank you!
 
I agree that the notes are not that clear when it comes to the exact minimum requirements. It is probably due to the fact that the Basel definitions of these tiers of capital are incredibly complex themselves. For example, see https://www.bis.org/bcbs/publ/d417.pdf if you want more detail. Tier 3 capital is only used to support market risk, which will be small in comparison to the other risks (is the maximum tier 3 a bank would be allowed to count would be 8% * market risk weighted assets). So the bulk of capital will be tier 1 + tier 2.
The regulatory minimum are also complex and depend on various circumstances (and whether its Basel II or Basel III) - see https://www.bis.org/bcbs/basel3/b3_bank_sup_reforms.pdf for more detail regarding Basel III, or the first few pages of https://www.bis.org/publ/bcbs128b.pdf if you want the Basel II details.
I do agree that all the ratio levels that you have mentioned above are consistent with the notes.
 
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