Abstract
This paper examines Capital Adequacy Framework that specifies the approaches for quantifying the Risk-Weighted Assets (RWA) for credit risk, market risk and operational risk. The computation of the risk-weighted assets is consistent with Pillar 1 requirements set out by the Basel Committee on Banking Supervision (BCBS) and the Islamic Financial Services Board (IFSB) in their respective documents - “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” issued in June 2006 and the “Capital Adequacy Standard (CAS)” issued in December 2005. While the Bank believes that such customization could be justified, a pragmatic approach is adopted for implementation. Higher prudential requirements and risk management standards would be introduced gradually taking into consideration industry feedback during the consultation process.
Highlights
Risks are part of our life; each of us may lose his/her job, lose his/her capital in a certain investment, or the like of risks we face but still we go on
In 1993, Basel Accord 1 included credit risks in the capital adequacy measurement; in 1998, the Accord was amended by adding market risks; in 2006, in the Revised Basel Capital Frameworkor Basel 2, operational risks were added to the capital requirements; credit risks assessment was increased compared with those defined in Basel Accord of 1993 alongside with distinguishing between credit risks of the different items of on- and off-balance sheet's assets when calculating the capital adequacy ratio, i.e. assets are weighted by risks according to specific ratios and weights defined in Basel 2
If the capital adequacy ratio is less than 8%, the bank should resort to the supplementary capital (Tier3) to cover market risks according to the following conditions: 1. The original maturity date should not be less than 2 years
Summary
Risks are part of our life; each of us may lose his/her job, lose his/her capital in a certain investment, or the like of risks we face but still we go on. Basel Accord 1 was issued in 1988 focusing on financial institutions' capital adequacy; it emphasized the necessity for institutions to have adequate capital to face expected risks in a way that guarantees that the institution will continue its work and will not collapse It included five ratings of risk levels (0%, 10%, 20%, 50%, and 100%). Despite all that we have mentioned about the importance of risk-taking and riskassessment, that should not be made in a way that harm the depositors' interests, the thing that we may consider the core of the revised version of Basel Accord that emphasizes the necessity of market control and follow-up and not being satisfied by the loan collaterals; a regular follow-up at short intervals, on one hand, and objective analysis and continuous follow-up of the economic sectors' performance alongside with some specific activities, on the other hand, requires the availability of specific supervision policies and a developed banking law that meets wise supervision requirements. No one can predict accidents and embezzlement can happen even under sound supervision (fraud may escape watchful eyes); misjudgments are part of our life for whatsoever reason (it is a matter of degree), but the important thing is not to destroy our trust in the banking system's credibility and honesty
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
