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Lecture Legal and regulatory aspects of banking supervision – Chapter 7

The following will be discussed in this chapter: Regulating bank capital adequacy, what is capital adequacy, regulations, 5C’s of credit, regulatory capital, tier 1 capital, tier 2 supplementary capital, revaluation reserves. | MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Session: SEVEN Summary of Previous Session General Types of Bank Regulations Privacy Regulations Anti-money laundering and anti-terrorism regulation Community re-investment regulation Deposit account regulation Deposit insurance regulation Consumer protection Withdrawal limit and reserve requirement 2 Summary of Previous Session (Contd.) Interest on demand deposits Lending Regulations Consumer protection Debt collection Credit cards Lending limits Central bank regulations Regulation of bank affiliates and holding companies 3 Agenda of this session SECTION 2: REGULATING BANK CAPITAL ADEQUACY What is Capital Adequacy Regulations 5C’s of Credit Regulatory Capital Tier 1 Capital Tier 2 Supplementary Capital Revaluation Reserves 4 Agenda of this session (Contd.) General Provisions Hybrid Debt Capital Instrument Sub-ordinated term debt Different international implementations 5 SECTION 2: REGULATING BANK CAPITAL . | MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Session: SEVEN Summary of Previous Session General Types of Bank Regulations Privacy Regulations Anti-money laundering and anti-terrorism regulation Community re-investment regulation Deposit account regulation Deposit insurance regulation Consumer protection Withdrawal limit and reserve requirement 2 Summary of Previous Session (Contd.) Interest on demand deposits Lending Regulations Consumer protection Debt collection Credit cards Lending limits Central bank regulations Regulation of bank affiliates and holding companies 3 Agenda of this session SECTION 2: REGULATING BANK CAPITAL ADEQUACY What is Capital Adequacy Regulations 5C’s of Credit Regulatory Capital Tier 1 Capital Tier 2 Supplementary Capital Revaluation Reserves 4 Agenda of this session (Contd.) General Provisions Hybrid Debt Capital Instrument Sub-ordinated term debt Different international implementations 5 SECTION 2: REGULATING BANK CAPITAL ADEQUACY 6 CAPITAL ADEQUACY Capital requirement (also known as Regulatory capital or Capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. 7 CAPITAL ADEQUACY (Contd.) These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the right side of a firms balance sheet. They should not be confused with reserve requirements, which govern the left side of a banks balance sheet--in particular, the proportion of its assets it must hold in cash. 8 Regulations A key part of bank regulation is to make sure that firms operating in the industry are prudently managed. The aim is to protect the firms themselves, their customers and the economy, by establishing rules to .