Capital Adequacy Computation Under Standardized Approach

May be this would be one of the important case studies for many students or junior officers working in Risk Management. I hope that this case study would give them sufficient knowledge to understand Basel - III guidelines. Since this is a very big exercise, the answers for the case study shall be provided over a period of time. Case Study (Capital Adequacy Computation under Standardized Approach). Though the capital adequacy computation methodology is same for all the countries under Basel – III, this case study is prepared for Banks in Middle East.

ABC Bank Limited has been operating in Middle East countries. The Bank has been using Standardized Approach for measuring the capital adequacy. Let us discuss what are the various asset classes and their exposures of this Bank. Let us compute the capital adequacy for credit exposures, market risk exposures and operational risk exposures independently and then we can consolidate all the risk weights to arrive at the Total Risk Weighted Assets of the Bank. For simplicity, the USD currency is used in this example. Hope this example would be useful for many Bankers who are new to the Risk Management or for any Banker who wishes to understand the job function of Risk Management. All the figures in this case study are in millions.

Line Item	Asset Class	Exposure (USD)
A	Cash balances with Central Bank	300
B	Claims on Sovereigns (Invested in Bonds issued by Federal governments /Central Banks / Reserve Banks of other countries) Break – up: Bonds issued by Central Banks of GCC countries è  100mn Bonds issued by Sovereigns other than Central Banks of GCC countries è 100mn   Total investments in the bonds issued by Central Banks of GCC countries is equal to: 200mn	200
C	Claims on Public Sector Enterprises (Guaranteed by Government)	500
D	Claims on Public Sector Enterprises (PSEs) – (Not Guaranteed by Government) (Excluding Non – Performing Loans / Past Dues)	500
E	Claims on Multi – Lateral Development Banks (MDBs)	1000
F	Total claims on local Banks	5000
G	Total claims on Foreign Banks	500
H	Total Claims on Corporate Companies (Excluding Non – Performing Loans / Past Dues)	10000
I	Regulatory Retail	20000
J	Retail Housing Loans	5000
K	Other Assets	5000
L	Non – Performing Loans (Past Dues)	2000
	Total Asset Book	50000

All these line items will be discussed over a period of time individually. We will collect the details of the results of risk weighted assets of all this asset book and we will consolidate at the end. Let us start computing the Risk Weighted Assets of the above Asset Book of the ABC Bank Ltd, incorporated in one of the Middle East countries.