Reserve Bank of India prescribes Tier I capital at 7 per cent of risk-weighted assets

The implementation of Basel III capital regulation will kick-start from January 1, 2013. It will be fully implemented by March 31, 2017. The Reserve Bank of India indicated this while releasing the draft guidelines outlining the proposed implementation of Basel III capital regulation in India.

These guidelines are in response to the comprehensive reform package entitled ‘Basel III: A global regulatory framework for more resilient banks and banking systems' of the Basel Committee on Banking Supervision (BCBS), issued in December, 2010.

The draft guidelines prescribe minimum capital requirements and also capital conservation buffer.

The apex bank has said that the common equity Tier-1 (CET1) capital must be at least 5.5 per cent of the risk-weighted assets (RWAs). While stating that the Tier-1 capital must be at least 7 per cent of RWAs, it has proposed the total capital to be at least 9 per cent of RWAs. The implementation period of minimum capital requirements and deductions from common equity will begin from January 1, 2013, and be fully implemented as on March 31, 2017. Under the Basel III norms, Tier-I capital should predominantly consist of common equity.

The objective is to improve the quality of capital.

The draft guidelines have also proposed a capital conservation buffer in the form of common equity of 2.5 per cent of RWAs.

The capital conservation buffer is designed to ensure that banks build up capital buffers during normal times (that is, outside periods of stress), which can be drawn down as losses incurred during the stressed period. The requirement is based on simple capital conservation rules designed to avoid breaches of minimum capital requirements. The capital conservation buffer in the form of a common equity will be phased in over four years in a uniform manner. The capital conservation buffer requirement is proposed to be implemented between March 31, 2014, and March 31, 2017.

The draft guidelines have also indicated that a counter-cyclical buffer within a range of 0-2.5 per cent of common equity or other fully loss absorbing capital will be implemented according to national circumstances.

“The purpose of counter-cyclical buffer is to achieve the broader macro-prudential goal of protecting the banking sector from periods of excessive aggregate credit growth,'' the Reserve Bank says. The counter-cyclical capital buffer would be introduced as an extension of the capital conservation buffer range.

The implementation schedule indicated above, however, will be finalised taking into account the feedback received on these guidelines.

According to the guidelines, instruments, which no longer qualify as regulatory capital instruments, will be phased out during the period beginning from January 1, 2013, to March 31, 2022.

For OTC derivatives, in addition to the capital charge for counterparty default risk under current exposure method, banks will be required to compute an additional credit value adjustments (CVA) risk capital charge.

The parallel run for the leverage ratio will be from January 1, 2013, to January 1, 2017, during which banks are expected to strive to operate at a minimum Tier-1 leverage ratio of five per cent.

The leverage ratio requirement will be finalised taking into account the final proposal of the Basel Committee.

The apex bank has said comments/feedback on the draft guidelines, including implementation schedule, should be sent by February 15, 2012.

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