1. First return developed on XBRL
Report on Capital Adequacy Under Basel II – RCA 2
First return developed on XBRL
Anujit Mitra
Department of Banking Supervision, RBI

2. Approach for Basel II
All commercial banks in India (excluding Local Area Banks and Regional Rural Banks) to adopt
Standardised Approach (SA) for credit risk
Basic Indicator Approach (BIA) for operational risk
Standardised Duration Approach (SDA) for computing capital requirement for market risks

3. Timeline - achieved
Mar 31, 2008 for all Foreign Banks operating in India and other Indian Banks having operational presence outside India
All other commercial banks (except Local Area Banks and Regional Rural Banks) were encouraged to migrate to these approaches under the Revised Framework in alignment with them but in any case not later than March 31, 2009

4. Parallel Run
Banks migrating to the revised framework were advised to have parallel run and they have been submitting the quarterly reports to their board and to RBI
Detailed return for the same has been introduced in December 2009, this was the first return implemented on XBRL platform by RBI
The same was re-launched over Internet in March 2009

5. Migration to the Advanced approaches - Flexibility
Banks, at their discretion, would have the option of adopting the advanced approaches for one or more of the risk categories, as per their preparedness, while continuing with the simpler approaches for other risk categories
It would not be necessary to adopt the advanced approaches for all the risk categories simultaneously.

6. Time Schedule for Advanced Approaches
The earliest date of making application by banks to the RBI
Likely date of approval by the RBI
Internal Models Approach (IMA) for Market Risk
01-Apr-10
31-Mar-11
The Standardised Approach (TSA) for Operational Risk
30-Sep-10
Advanced Measurement Approach (AMA) for Operational Risk
01-Apr-12
31-Mar-14
Internal Ratings-Based (IRB) Approaches for Credit Risk (Foundation- as well as Advanced IRB)

7. Presenting the system – Users From RBI
Administrator
Manages Bank Master and creates Administrators for those banks
View system MIS reports and log
Has full access right over all banks to view their returns
May Reject returns submitted by the bank (s)
Users
Has predefined access right to view returns and generate reports

8. Users from Banks Administrator
Creates / deletes users from the banks and defines the role of each user (maker-checker)
Users
Maker - Enabled to enter, modify and view data but would not be able to submit data to RBI
Checker - Enabled to view and submit data

9. Banks’ view of the system
Accessible through the ORFS page – secure access
Data Preparation
Login
Download Excel Template
Fill in data
Validate - debug

10. Submission of Data Create Instance Document
XBRL instance created – transparent to the user
Save document
Submit to RBI
Encrypt with digital signature or symmetric encryption
Print for records, if required

11. Retrieve submitted returns
After logging in user may be able to view / download returns already submitted
He may download the same and modify
He may resubmit

12. Advanced approach
Use the MIS to create the XML output or even better – make use of the XBRL
Upload document
Submit to RBI
Encrypt with digital signature or symmetric encryption

13. Expected developments in RBI
Further versions of RCA II – next one possibly by December 2009
Working group on OSMOS re-devolopment
Reviewing the return structures
May suggest quick XBRL adoption for all OSMOS returns
May suggest few new returns for Basel II

14. At RBI - Analysis of returns
Through Standard reports
Fixed format
Frequently used
Easy to generate and use
Through Adhoc reports
User to choose elements
Downloadable to Excel for further Analysis

16. Analysis - A look at Capital Adequacy
Need for capital
Acceptable capital standards
Initiatives of Basel (BCBS)
Basel I Accord
Basel II Accord
Risk assessment under Basel II

17. Need for capital Supports bank’s operations (source of funds)
• Provides cushion against unexpected losses stemming from credit, market and operational risks – thus maintains solvency of a bank
• Encourages depositors’ confidence
• Encourages shareholders’ interest in governance of the bank
• Regulatory comfort as bank insolvency is costly to the economy

18. How much capital??
Before Basel standards, regulators set minimum capital requirements in absolute terms or as gearing ratio.
After Basel, capital is aligned to the quantum of risks carried by a bank.
Elimination of probability of bank insolvency is not possible hence the present capital standards aim to ensure that a bank would not be insolvent under an acceptable probability.
Measuring losses to quantify the level of capital requirement is the core issue.

19. Basel I Capital Accord
Pioneered the international convergence on measuring banking risks and defining capital standards
Essentially focused on standards for measuring credit risk (biggest risk faced by banks)
Added explicit capital charge for market risks in 1996
Specified the minimum level of capital as a function of risk weighted assets
Defined components of regulatory capital
Easy to understand and simple to implement
Helped to recognise the importance of capital in managing banking risk
Besides G-10, adopted by over 100 countries

20. Basel I to Basel II Weaknesses of Basel I Hence the need for Basel II
One size fits all approach
Crude method of credit risk measurement However, measurement of market risks is more scientific and aligned to reality
Inadequate differentiation of credit risk
Risk mitigation techniques not recognised
No incentives for better risk management
Not addressed all risks
Encouraged regulatory arbitrage (securitisation and credit derivatives)
Hence the need for Basel II

21. Basel II Accord Extensive consultative process beginning June 1999
Rests on three mutually reinforcing Pillars
Quantum of capital linked to riskiness of exposure
Covers capital charge for operational risk besides credit and market risks
Provides a menu of options to calculate credit risk and operational risk
Incorporates supervisory review process to address risks not covered under Pillar I and allows risk based supervision
Incentives for better risk management and control environment through lesser capital requirement
Ensures market discipline through comprehensive disclosure requirements

22. Basel I Vs. Basel II – All Banks CRAR
(as of Mar 2009)
 (Amounts in Rs.Cr.)
Basel I
Basel II
Tier I Capital
331,494
333,810
Tier II Capital
157,143
154,016
Total Capital
488,637
487,826
Total RWA
3704,827
3488,303
CRAR
13.19
13.98
Core CRAR
8.95
9.57

23. Basel I Vs. Basel II - Foreign Banks (as of Mar 2009)
 (Amounts in Rs.Cr.)
Basel I
Basel II
Tier I Capital
51407
51811
Tier II Capital
9203
9105
Total Capital
60609
60916
Total RWA
403033
425327
CRAR
15.04
14.32
Core CRAR
12.75
12.18

24. Basel I Vs. Basel II – Nationalised Banks
(as of Mar 2009)
 (Amounts in Rs.Cr.)
Basel I
Basel II
Tier I Capital
191053
192268
Tier II Capital
116692
114063
Total Capital
307745
306331
Total RWA
CRAR
12.32
13.49
Core CRAR
7.65
8.46

25. Basel I Vs. Basel II – NPBs
(as of Mar 2009)
 (Amounts in Rs.Cr.)
Basel I
Basel II
Tier I Capital
72602
73152
Tier II Capital
27944
27756
Total Capital
100546
100908
Total RWA
665762
658331
CRAR
15.10
15.33
Core CRAR
10.91
11.11

26. Basel I Vs. Basel II – OPBs
(as of Mar 2009)
 (Amounts in Rs.Cr.)
Basel I
Basel II
Tier I Capital
16360
16579
Tier II Capital
3301
3092
Total Capital
19662
19671
Total RWA
137180
133301
CRAR
14.33
14.76
Core CRAR
11.93
12.44

27. Basel I Vs. Basel II – who benefitted
(as of Mar 2009)
Out of the 80 banks 49 banks shown higher CRAR
17 out of 30 foreign banks got CRAR lower under Basel II
9 out of 15 Old Private Sector Banks and 2 out of 7 New Private Sector Banks shown higher CRAR under Basel II
Only 6 out of 27 Nationalised Banks including SBI Group have shown lower CRAR
35 banks have shown higher RWA under Basel II

28. Assessment of Capital Adequacy – Standardised Approach
A bank’s capital base is dynamic reflecting the success or otherwise of the bank’s ongoing business of managing risks through its control environment
Analysis should broadly include
Regulatory capital and
Risk assets – on and off balance sheet
Regulatory capital
Level of capital adequacy ratio and trend over periods
Quality – proportion of Tier I capital to total capital and trend over periods
Components of Tier I capital

29. Assessment of Capital Adequacy – Standardised Approach
Extent of fixed charge on profitability and available headroom – level of preference shares and debt instruments
Quality of Tier II capital – extent of revaluation reserves, upper Tier II & lower Tier II components, available headroom to raise further capital
Trends in deductions from regulatory capital especially on account of securitisation related exposures and intangible assets

30. Assessment of Capital Adequacy – Standardised Approach
Risk Assets - on balance sheet – trends
Absolute quantum, Composition, Quality, and Riskiness
Movements in credit, market and operational risk
Reflects the direction of business strategy and risk appetite
Growth in quantum of risk assets to be compared in relation to total assets and regulatory capital

31. Assessment of Capital Adequacy – Standardised Approach
Credit Risk Exposure (excluding securitisation)
Counter party wise distribution
Rating wise distribution
Risk weight wise distribution
Extent of credit risk mitigation (CRM) used to reduce risk
Credit Risk Exposure (Securitisation)
Level of exposures as originator and other than originator
Rating wise & risk weight wise distribution
Extent of exposures backed by commercial real estate, liquidity facilities (drawn and undrawn)
Risk adjusted exposures as % of total credit risk exposure, total risk weighted assets and total assets

32. Assessment of Capital Adequacy – Standardised Approach
Credit Risk – Off Balance Sheet (OBS) Exposures
Non Market related
Trends in quantum and composition of contingent credits & commitments
Volume of financial guarantees, undrawn committed lines of credit, Letter of credits
Share in total off balance sheet exposures
Market related (Derivatives)
Quantum and composition
Maturity & potential future CCF wise distribution
Trend in potential and current exposure
Total OBS exposures as % of total on balance sheet assets

33. Assessment of Capital Adequacy
Capital charge for failed transactions
Securities transactions
Foreign exchange transactions
Market Risk Exposures
Trends in capital charge
Specific risk for securities held in HFT and AFS
General market risk for securities held in HFT & AFS
Equity position
Foreign exchange and gold position

34. Assessment of Capital Adequacy
Residual maturity wise securities held in (reflect potential market risk exposure)
HFT category
AFS category
Bonds of banks attracting higher capital charge due to adverse CRAR
Operational Risk
Trends in capital charge

35. Assessment of Capital Adequacy
Issues
To provide input for Supervisory Review & Evaluation Process (SREP) under Pillar II
So deciding the trade off between granularity to be captured and ease of compilation / data management is crucial

36. Thank you !!!