BANK's- CAR or CRAR
As per data taken from Bloomberg, yesterday YES bank has said that they have Tier 1 Capital of 8.7%Hence there is nothing to get panic about YES Bank as of now.
Let's see what does CAR means.
As an Investor we all are fond of Investing in Banking sectors.
But investing alone is not enough and you need to monitor the CAR of a bank.
CAR
CAR is known as Capital Adequacy Ratio. It is also known as CRAR which is Capital to Risk Asset Ratio. These represent ratios of the Bank's capital to its risk.
2008 Crisis:
We all are aware of the credit crisis that has happened in the year 2008. From that decision was taken that the bank should maintain minimum capital requirements and leverage ratios. Hence came Basel 3 Norms.
Who sets these?
Basel 3 is an international regulatory Accord that sets out reforms to improve regulation, supervision and risk management in the banking sector.
More the CAR then more they are sustainable to withstand a reasonable amount
of losses.
Three types of capitals are measured with CAR. They are
1. Tier 1 Capital
2. Tier 2 Capital
3. Tier 3 Capital
Tier 1 Capital:
Tier 1 Capital is the combination of equity capital and disclosed reserves. It acts like the primary component of a bank. It forms the basis of the strength of a firm.
Tier 1 CAR = Tier 1 Capital/RWA
RWA is Risk-Weighted Assets
Tier 1 funds should be always made available and bank will use whenever they need it.
Under Basel 3, Tier 1 Capital should be 10.5%
Tier 2 Capital:
Tier 2 Capital consists of revaluation reserves, hybrid capital instruments, subordinated term debt. It acts as a supplementary component.
Revaluation reserves in the sense it indicates the current value of the holding. An example is Real Estate
Hybrid capital means convertible bonds
Subordinated term debt means uncollected reserves.
As per base 3, Minimum CAR is 12.9%
It is very difficult to calculate Tier 2 exactly but Tier 2 is always less reliable than Tier 1 for a Bank.
Under Basel 3, bank's Tier 1 and Tier 2 Capital must be a minimum of 8% of its holdings
Banks total capital = Tier 1 + Tier 2 Capital
Tier 3 Capital:
Tier 3 capital = Tier 2 Capital+short term subordinated loans.
Tier 3 Capital includes market risk, commodity risk and foreign currency risk.
Assets must be 250% of banks tier 1 Capital.
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