The banking system of the Russian Federation operates in unstable conditions. Therefore, the stability control of commercial structures is being strengthened. For these purposes, the Central Bank has developed capital adequacy standards.
Essence
Equity Bank - this is the most important source of resources, which is initially formed at the expense of the owners and is irrevocable. Money is used to maintain the stability of the financial condition of the bank.
Equity performs a number of important functions:
- protects the interests of investors, acting as a source of covering unforeseen expenses;
- is a source of financing the operational activities of the bank;
- serves to support the growth of assets and liabilities.
Therefore, the assessment of the adequacy of equity capital (IC) is an important stage of the bank. The analysis examines the availability of a sufficient amount of funds in the bank, identifies trends in the capital structure, calculates “net” capital and determines the reserve for growth.
Methodologies
Capital Adequacy Ratios Bank are determined by the scale of its activities. But there are several methods for their calculation. For example, according to the methodology developed by the Bank of Russia, the amount of subordinated loan is included in the composition of own funds, which can increase or decrease capital, but these items are not taken into account in the balance sheet.
Unreasonable overstatement of the amount of capital leads to false information about the state of the bank and misleads depositors and shareholders. The lending institution itself is forced to expand active operations, being exposed to even greater risks. If the calculations showed an artificially lowered value of SC, then in the future there will be a decrease in income
It is necessary not only to calculate the capital adequacy standards, but also to study the structure of own funds and compare these data in dynamics. To analyze the financial condition of the bank, forms No. 1 and 2 are used. The first contains information on economic standards and the reasons for their violation. The second provides a breakdown of individual accounts.
Basel
The regulation of banks at the international level is carried out by the Basel Committee. Back in 1998, the first capital adequacy standards were drafted, which were then used by regulators from around the world, including on a voluntary basis. The methodology is developed on three components: capital requirements, supervision and market discipline. Basel I is the link between the supervisor and credit institutions.
World crises contributed to the tightening of requirements for the level of stability of credit institutions, including the adequacy of the bank’s own capital. In December 2010, Basel III was adopted with new requirements and standards. Particular attention was paid to the quality of management. New rules began to operate in 2014.
The changes in them affected the level of transparency of capital sources. Preferred shares and associated share premiums are transferred to additional assets. In this regard, the UK should be supported by profit.
The requirements for subordinated loans have also tightened. Loans raised before 03/01/2013 are amortized at a 10% rate. New loans become perpetual. If the condition of the bank worsens, they are converted into ordinary shares. In Russia, new capital adequacy ratios were introduced gradually. The last stage was held in 2015.
Classification
According to Basel, all bank assets are grouped by risk level.
| Group | Assets | Coefficient, % |
| 1 | Cashbox | 0,5 |
| Funds for correspondent accounts in the Central Bank of Russia | 0,0 | |
| Government short-term bonds | 0,0 | |
| 2 | Central Bank of the Government of Russia | 10 |
| State Guaranteed Loans | 15 | |
| Capital investments, OS | 25 | |
| Correspondent accounts in banks of other countries | 20 | |
| 3 | Loans to other banks | 25 |
| Short-term loans minus state guaranteed | 30 | |
| Factoring operations | 50 | |
| 4 | Long-term loans minus state guaranteed | 50 |
| Leasing operations | 60 | |
| 5 | Acquired by OJSC Central Bank | 70 |
| Right to participate | 80 |
Despite the classification, the degree of one and the same risk may vary depending on the availability of guarantees, insurance and other indicators. For example, long-term loans have a risk level of 80%, but if there is a guarantee of the State Insurance, then this indicator is reduced to 50%.
Own funds
According to the considered method, the bank’s capital is divided into two categories - the first and second levels:
1. Equity (SC) = fixed capital (OK) + additional capital (QC).
2. Fixed capital = basic capital (BC) + additional paid-in capital (DC).
The cost of ordinary shares, the amount of share premium on them and retained earnings are part of the BC. Preferred shares, the amount of share premium on them and indisputable subordinated loans comprise DC. In turn, PK includes subordinated loans issued for 5 years, and value growth after revaluation of fixed assets.
Capital adequacy ratio (N1), the maximum risk exposure for loans - the value of SK is included in the calculation of all these indicators.
Liquidity
A credit institution must fully and on time fulfill all its obligations. For these purposes, separate capital adequacy ratios are calculated. The value of the coefficients is compared with the normative. If strong deviations are detected, the bank will face penalties, a ban on operations and even revocation of a license.
Odds
Instant liquidity (H2) shows the risks of loss of solvency in one working day. The indicator is calculated by dividing the assets that the financial institution can sell in a day and the obligations of the bank that customers can demand to fulfill at any time (current customer accounts, deposits, one-day loans). The amount of liabilities is preliminarily adjusted for the total minimum balance of funds on demand accounts. The minimum value of the indicator is 15%.
Current liquidity (Н3) shows the risk of a decrease in solvency during the month. Assets to be sold in the next 30 days are compared with the amount of liabilities that can be claimed for the same period, and then adjusted for the minimum balance of funds on demand accounts and those for which the due date is due in the next 30 days. The calculated value of the indicator should exceed 50%.
Violation of the H2 and H3 levels indicates an insufficient liquidity reserve of the bank.
The long-term liquidity ratio (H4) reflects the marginal risk level of reducing a bank's insolvency after placing funds in long-term assets (for example, mortgages, car loans). At the same time, the amount of assets with a realization period of more than a year minus the accumulated reserves is compared with the amount of capital and long-term liabilities. In turn, liabilities are adjusted for the minimum balance of funds in accounts with a demand period of more than one year. This indicator should not exceed 120%. If the bank invests funds from short-term liabilities in long-term assets, then the value of H4 will exceed the normative. Such a situation may arise if a lending institution issues a mortgage for 25 years at the expense of funds borrowed for 30 days.
Н1 - main capital adequacy ratio
The calculation of the indicator is carried out by dividing the UK and the total volume of assets, taking into account the risk group. Coefficients Н1.1, Н1.2 and Н1.0 are obligatory for observance by all banks.According to BR Instruction No. 139, these indicators regulate the risk of insolvency of a credit institution and determine the required minimum amount of insurance required to cover all types of risks.
- Base capital adequacy ratio (N1.1) = BC / amount of deposits x 100% (minimum value - 5%).
- Sufficiency standard OK (H1.2) = OK: Amount of deposits x 100% (minimum value - 6%).
- Sufficiency SK (N1.0) = SK: the amount of deposits x 100% (the minimum value is 10%).
H1 determines the ability of the bank to level financial losses on its own. The decrease in the indicator most often occurs due to a deterioration in the quality of the loan portfolio and strong asset growth. If the capital adequacy ratio N1 reaches its limit value, the regulator may require that the bank increase the size of the insurance company or reduce the volume of transactions with risky assets.
Limits
The ability of a credit institution to make timely and full payments on obligations depends in particular on the financial situation of the borrowers. Therefore, before issuing a loan, one should take into account the solvency of organizations, including the possibility of bankruptcy of several borrowers. If the client cannot repay the debt on time, it is very important that this does not affect the work of the bank itself. Therefore, you should calculate the maximum loan size. For this purpose, separate capital adequacy standards have been developed.
Maximum loan per client (H6)
This indicator is set as a percentage of SK. The calculation is carried out as follows: the total amount of loans issued to one is correlated with the volume of guarantees and sureties. Formula:
N6 = KR: Bank capital x 100%, where KR is the total amount of bank claims for loans, bills, deposits in precious metals, taking into account uncollected guarantees, off-balance sheet claims on this borrower in cash.
Н6 is calculated based on the total amount of claims in rubles, currency or precious metals for the organization acting as a borrower in interbank loans or as a guarantor in any transaction.
The size of major risks (H7)
This standard is defined as the ratio of the total value of large loans and UK. The first category includes loans for which the amount of claims subject to risk exceeds 5%. The decision to issue such loans is made based on the results of a detailed analysis of the transaction and is executed in a separate document. The value of this indicator cannot exceed the amount of SK more than 8 times.
Maximum risk per borrower (N8) and shareholder (N9)
The capital adequacy ratio N8 is set as a percentage of the amount of the deposit, loan, guarantees received, account balances of one client and IC bank. For N9, the numerator calculates all the same indicators, but with respect to one shareholder of the bank.
Insider Risks (H10)
This indicator is calculated by dividing the total amount of claims (loans, deposits, account balances) in relation to the person associated with the bank and the credit institution IC. In international practice, insiders include such individuals: shareholders holding more than 25% of the Central Bank, directors (president, chairmen, their deputies), members of the board, committee, heads of subsidiaries and other persons who may influence the decision on granting a loan.
Accepted securities risk (Н13)
To calculate this indicator, promissory notes issued by the bank, as well as 50% of off-balance sheet liabilities under endorsement, avals are related to the UK.
Other ratios
You can calculate the maximum size of insurance funds that can be used to purchase shares of other enterprises (N12) by the ratio of the invested amounts to the securities of other institutions and to your own. The regulator allows you to send to other enterprises no more than 25% of insurance companies.
The ratio of the amount of liquid assets with a maturity of 30 days and obligations taken (H15) should be more than 100%.
The maximum amount of loans of customers participating in settlements, minus provided by RNCOs on completed transactions (N16), shall not exceed the total amount of loans granted.
In the total loan portfolio, the share of mortgage loans should be more than 10% (Н17). That is, only banks that specialize in this market segment can refinance a loan to purchase a home.
The Basel methodology provides for a number of similar indicators that are calculated in relation to the banking group. But the limit values of the coefficients for such consortia exceed those listed above. However, capital adequacy ratios are the same as for a single financial institution.
