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 on Banking sectors.
But investing alone is not enough and you need to monitor 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 represents ratios of Bank's capital to it's risk.
* 2008 Crisis:
We all are aware about credit crisis that has happened on the year 2008. From that decision was taken that the bank should maintain minimum capital requirements and leverage ratios. Hence came Basel 3.
* Who sets these?
Basel 3 which is an international regulatory Accord that sets out reforms to improve regulation, supervison and risk management in banking Sector.
More the CAR then more they are sustainable to withstand 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 primary components of a bank. It forms the basis of 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 supplumentary component.
Revaluation reserves in the sense it indicates current value of holding. 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