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ANNEX 9 Worked out examples for computing capital charge for credit and market risks Example I- Case

where the trading book does not contain equities and interest rate related derivative instruments 1. 1. Assumptions: 1.1. 1.1. A bank may have the following position: Sl. No 1 2 3. Details Cash & Balances with RBI Bank balances Investments 3.1 Held for Trading (Market Value) 3.2 Available for Sale (Market Value) 3.3 Held to Maturity Advances (net) Other Assets Total Assets Amount Rs. Crore 200.00 200.00 2000.00 500.00 1000.00 500.00 2000.00 300.00 4700.00

4 5 6

1.2. 1.2. In terms of counter party, the investments are assumed to be as under: Government Banks Others - Rs.1000 crore - Rs. 500 crore - Rs. 500 crore

1.3. 1.3. For simplicity sake the details of investments are assumed to be as under: i) i) Government securities Date of Issue 01/03/1992 01/05/1993 01/03/1994 01/03/1995 01/03/1998 01/03/1999 01/03/2000 01/03/2001 01/03/2002 01/03/2003 Total Date of reporting 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 Maturity Date 01/03/2004 01/05/2003 31/05/2003 01/03/2015 01/03/2010 01/03/2009 01/03/2005 01/03/2006 01/03/2012 01/03/2023 Amount Rs.in crore 100 100 100 100 100 100 100 100 100 100 1000 Coupon (%) 12.50 12.00 12.00 12.00 11.50 11.00 10.50 10.00 8.00 6.50 Type AFS AFS AFS AFS AFS AFS HFT HTM HTM HTM

50 12.50 Type Date of reporting 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 Maturity Date 01/03/2004 01/05/2003 31/05/2003 01/03/2006 01/03/2007 Amount Rs. Thus.00 12. iv). Risk weighted assets for credit risk As per the guidelines. 2.50 Type AFS AFS AFS AFS HFT 01/03/2004 01/05/2003 31/05/2003 01/03/2006 01/03/2017 HFT HFT HFT HTM HTM HFT AFS Trading Book HTM Total 2. in crore) Other securities Total 300 0 300 200 500 500 1000 1500 500 2000 of Date of reporting 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 Maturity Date Amount Rs. Computation of risk weighted assets 2.00 12. Held for Trading and Available for Sale securities would qualify to be categorized as Trading Book.00 12. Other securities Date Issue 01/03/1992 01/05/1993 01/03/1994 01/03/1995 01/03/1998 Total iv). the securities held under trading book would be excluded and hence the riskweighted assets for credit risks would be as under: .00 12. ii).50 11. iii). Overall position Break-up of total investments Government Securities 100 600 700 300 1000 Bank bonds 100 400 500 0 500 ( Rs. Bank Bonds Date of Issue 01/03/1992 01/05/1993 01/03/1994 01/03/1995 01/03/1998 Total iii). in crore 100 100 100 100 100 500 Coupon (%) 12.1. While computing the credit risk. 2. trading book in the instant case would be Rs. in crore 100 100 100 100 100 500 Coupon (%) 12.1.1500 crore as indicated above.50 12.ii).50 11.

Risk weighted assets for market risk ( Trading Book) (Please refer to table in para 1.125% 1.325 crore + Rs.325 crore Therefore.325 (iii) Other securities : Rs. in crore) Capital charge 0. Details of Assets Market Value* 200 200 300 0 200 2000 300 3200 Risk Weight (%) 0 20 0 20 100 100 100 (Rs.700 crore – Nil (ii) Bank bonds: Details For residual term to final maturity 6 months or less For residual term to final maturity between 6 and 24 months For residual term to final maturity exceeding 24 months Total Capital charge 0.5. b.300 crore @ 9% =Rs.32. 2.No.125 3. For all the securities listed below.60 5.80% Amount 200 100 200 500 (Rs. date of reporting is taken as 31/3/2003.3(iv) a.30% 1. 32.27 crore = Rs. in crore) Risk weighted Assets 0 40 0 0 200 2000 300 2540 1 2 3 4 5 6 Cash & balances with RBI Bank balances Investments: Government Banks Others Advances (net) Other Assets Total Assets *Assumed as Market Value for illustration 2.2.33 crore. . Specific Risk (i) Government securities: Rs.Sl.60 1.2. General Market Risk Modified duration is used to arrive at the price sensitivity of an interest rate related instrument. 27 crore Total charge for specifc risk (i)+(ii)+(iii) = Rs. capital charge for specific risk in trading book is Rs.0 crore+Rs.

.00 12.29 0.33 crore + Rs.50.16 3. 2. Rs.50 12.32.63 2.50 12.17.50 12.3 Computing the capital ratio 1 2 3 4 5 Total Capital Risk weighted assets for Credit Risk Risk weighted assets for Market Risk Total Risk weighted assets (2+3) CRAR [(1÷4)*100] (Rs.00 12. Govt.00 12.16 17. Banks Banks Banks Banks Banks Others Others Others Maturity Date 01/03/2004 01/05/2003 31/05/2003 01/03/2015 01/03/2010 01/03/2009 01/03/2005 01/03/2004 01/05/2003 31/05/2003 01/03/2006 01/03/2007 01/03/2004 01/05/2003 31/05/2003 Total Amount (market value) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 1500 Coupon (%) 12.50 12.15*(100 ÷ 9) = Rs. this capital charge needs to be converted into equivalent risk weighted assets.e.75 1.15 crore.00 12. i.35 0. Govt.77 2. Foreign exchange and gold open positions also have been assumed.08 0.50 11. the capital charge could be converted to risk weighted assets by multiplying the capital charge by (100 ÷ 9).91 % Example 2.16 1.50 11. d.08 0.00 557.557. Govt.23 12. capital charge for Market Risks = Rs. the minimum CRAR is 9%.84 0.79 2.82 crore. Govt. In India. in Crore) 400 2540. in crore) Capital Charge for general market risk 0. Thus risk weighted assets for market risk is 50.84 0.50 11. Total charge for market risk Adding the capital charges for specific risk as well as general market risk would give the total capital charge for the trading book of interest rate related instruments.00 12.50 12. To facilitate computation of CRAR for the whole book. .00 (Rs.23 crore.84 0. Hence.Counter Party Govt.00 10. 2. Govt.82 c. Govt.08 0. Therefore.23 3097.indicating computation of capital charge for credit and market risks – with equities and interest rate related derivative instruments.3.

In terms of counter party the investments are assumed to be as under: a) Interest rate related securities Government Banks Corporate Bonds b) Equities Others Rs.00 5000.Assumptions A bank may have the following position: Sl.00 200.40 crore.5 years.300 crore For interest rate swaps and interest rate futures the counterparties are assumed to be corporates.1 Interest Rate related Securities Held for Trading Available for Sale Held to Maturity 3. in Crore 200. 500 crore Rs.100 crore – bank received floating rate interest and pays fixed. 500 crore Rs.00 300. For simplicity sake let us assume the details of investments in interest rate related securities as under: . life of underlying government security 3. Rs.00 300.50 crore. Let us also assume that the bank is having the following positions in interest rate related derivatives: (i) (i) Interest Rate Swaps (IRS).00 2000. delivery after 6 months.1000 crore Rs. next interest fixing after 6 months. and (ii) (ii) Long position in interest rate future (IRF). No 1 2 3 Details Cash & Balances with Bank balances Investments 3.2 Equities 4 5 6 Advances (net) Other Assets Total Assets 500.00 Rs. Rs.00 1000.60 crore and Gold open position is assumed at Rs.00 500. residual life of swap 8 years.00 foreign exchange open position limit is assumed as Rs.

crore 100 100 100 100 100 500 Type Coupon (%) 12.00 12.50 11.00 10.00 12.00 12.00 12.50 12. Bank Other Total Securities bonds securities 100 100 300 500 600 400 0 1000 700 500 300 1500 300 1000 0 500 200 500 500 2000 Equity Grand Total 800 1000 1800 500 2300 300 0 300 0 300 .50 Type AFS AFS AFS AFS AFS AFS HFT HTM HTM HTM AFS AFS AFS AFS HFT 01/03/1992 01/05/1993 01/03/1994 01/03/1995 01/03/1998 Total iv).50 12.crore 100 100 100 100 100 100 100 100 100 100 1000 Coupo n (%) 12.50 10.50 11.50 11.crore 100 100 100 100 100 500 Type Coupon (%) 12.50 11.50 Date of reporting 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 Maturity Date 01/03/2004 01/05/2003 31/05/2003 01/03/2006 01/03/2007 Amount Rs.00 12.00 6.00 8.50 Date of reporting 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 Maturity Date 01/03/2004 01/05/2003 31/05/2003 01/03/2015 01/03/2010 01/03/2009 01/03/2005 01/03/2006 01/03/2012 01/03/2023 Amount Rs.00 12. Overall Position HFT HFT HFT HTM HTM HFT AFS Tradin g Book HTM Grand Total Break-up of total investments Interest rate related instruments Govt.50 12.i) Government securities Date of Issue 01/03/1992 01/05/1993 01/03/1994 01/03/1995 01/03/1998 01/03/1999 01/03/2000 01/03/2001 01/03/2002 01/03/2003 Total ii) Bank Bonds Date of Issue 01/03/1992 01/05/1993 01/03/1994 01/03/1995 01/03/1998 Total iii) Other securities Date of Issue Date of reporting 31/03/2003 31/03/2003 31/03/2003 31/03/2003 31/03/2003 Maturity Date 01/03/2004 01/05/2003 31/05/2003 01/03/2006 01/03/2017 Amount Rs.

5% 3350 100% 8.7(iv) ) a.25 Total 2548.300 crore would be in the trading book. Investments in interest rate related instruments: (i) Government securities – Rs. The derivative products held by banks are to be considered as part of trading book. the securities held under trading book would be excluded and hence the credit risk based risk-weights would be as under: (Rs. equities position of Rs.700 crore – Nil (ii) Bank bonds . Open position on foreign exchange and gold also would be considered for market risk. In addition. While computing the capital charge for credit risk. Thus trading book in respect of interest rate related investments in the instant case would be Rs.00 IRF 100% 0.1500 crore. Specific Risk 1. held for trading and available for sale securities would qualify to be categorized as Trading Book.Computation of risk weighted assets Risk weighted assets for credit risk As per the guidelines. as indicated above.25 Risk weighted assets for market risk ( Trading Book) ( please refer to table in para 1. in crore) Details of Assets Cash& RBI Bank balances Investments in (HTM category) Government Banks Corporate Bonds Advances (net) Other Assets Total Credit Risk for Derivatives: IRS Book Value 200 200 Risk Weight 0% 20% Risk weighted Assets 0 40 300 0 200 2000 300 3200 0% 20% 100% 100% 100% 0 0 200 2000 300 2540 OTC 100 (Credit conversion factor 1% + 1% per year) 50 (Credit conversion factor for maturities less than one year – 0.

00 0.5.77 Banks 01/03/2007 100 11. General Market Risk (1).00 2.84 Others 01/05/2003 100 12.29 Others 01/03/2004 100 12.00 0.crore) Capital Charge 0.325 crore+Rs. 31/05/2003 100 12. (Rs.08 Banks 31/05/2003 100 12.82 (2) Positions in interest rate related derivatives . capital charge for specific risk in the trading book is Rs.325 For residual term to final maturity 6 months or less For residual term to final maturity between 6 and 24 months For residual term to final maturity exceeding 24 months Total (iii) Others Rs.00 0.125 3.125% 1.325 crore 2.50 1.35 Banks 01/03/2004 100 12. 01/03/2015 100 12.00 0.33 crore (Rs.27 crore = Rs.50 2.27 crore Total specific charge (1+2) Therefore.75 Govt.63 Govt.27 crore 200 100 200 500 Total : (i)+(ii)+(iii) = Rs.crore) Coupo Capital Counter Maturity Amou n charge Party Date nt for market (%) value general market risk Govt. date of reporting is taken as 31/3/2003.84 Banks 01/05/2003 100 12. Equities – capital charge of 9% = Rs.08 Govt.79 Govt. For all the securities listed below.600 5. 01/03/2004 100 12.33 crore + Rs. 27 crore). 32.50 1.300 crore @ 9% = Rs. 01/05/2003 100 12.50 0.0 crore+Rs.50 3.16 Total 1500 17.50 2.50 0.00 0. b.84 Govt.30% 1.50 0.16 Banks 01/03/2006 100 12.00 0.80% Amount (Rs.600 1.08 Others 31/05/2003 100 12.32. 01/03/2005 100 10. 01/03/2010 100 11. 59. Investments in interest rate related instruments: Modified duration is used to arrive at the price sensitivity of an interest rate related instrument. 01/03/2009 100 11.16 Govt.Details Capital charge 0.

whichever is lower.60 Capital charge* GOI GOI 30/09/2003 31/03/2011 0.79 is subjected to a capital charge of 5% i.3 years. This off-setting position of 0. The sum of long positions in the 7. there is no need for any vertical disallowance. vertical disallowance is applicable under 3-6 month time band and 7.79.14 Assumed change in yield (ACI) 1.08 (-) 2.e.2. banks should recognize the basis risk (different types of instruments whose price responds differently for movement in general rates) and gap risk (different maturities within timebands).22 and 2. This off-setting position of 2. will be the either the sum of long positions and or the short positions within a time band. banks in India will generally not be subject to vertical disallowance unless they have a short position in derivatives. Therefore. 3. Banks in India are not allowed to take any short position in their books. for vertical disallowance. Then. 0.22.47 (-) 3. It may be mentioned here that if a bank does not have both long and short positions in the same time band. 3.84 Assumed change in yield 1. In the table at the end of the annex.00 0.79 and the sum of short positions in this time band is (-) 3. .e matched long and short positions in different time bands may not perfectly off-set.3-9. banks must subject their positions to a second round of off-setting across time bands with a view to give recognition to the fact that interest rate movements are not perfectly correlated across maturity bands (yield curve risk and spread risk) i. there is no off-setting position in any other time band.47 and the sum of short positions in this time band is (-) 0. This is achieved by a “Horizontal Disallowance”. Horizontal disallowances in respect of adjacent zones are not applicable in the instant case. where there are off-setting positions of (-) 0.3 years time band is + 2.47 5.08.3-9.Interest rate swap Counter Party Maturity Date Notional Amount (i. market value) 50 50 Modified duration or price sensitivity 0.225 1.1395.1 Calculation of Vertical Disallowance While calculating capital charge for general market risk on interest rate related instruments. The sum of long positions in the 3-6 months time band is + 0.e.market value) 100 100 Modified duration or price sensitivity 0.61 Interest rate future Counter Party Maturity Date Notional Amount (i.75 Capital charge GOI GOI 30/09/2003 31/03/2007 (-) 0. horizontal disallowance is applicable only in respect of Zone 3. net positions in each time band have been computed for horizontal offsetting subject to the disallowances mentioned in the table.e. Calculation of Horizontal Disallowance While calculating capital charge for general market risk on interest rate related instruments. 0..45 2. In the instant case.00 0.22 is subjected to a capital charge of 5% i.3 year time band. This is addressed by a small capital charge (5%) on matched (off-setting) positions in each time band (“Vertical Disallowance”) An off-setting position. Long and short positions within a time band have been subjected to vertical disallowance of 5%. except in derivatives.3-9.840 (3) Disallowances The price sensitivities calculated as above have been slotted into a duration-based ladder with fifteen timebands as shown in table at the end of the Anenxure.e. except for the time band 3-6 months in Zone 1 and the time band of 7. In the instant case.01..070 0.

In the above example.500 Amount (Rs.3-9. general market risk capital charge on equities would work out to Rs.06.3 years) where there is an off-setting (matched) position of (-) 0.82 – 2. whichever is lower.3 to 9.61 + 0.09 nil Nil 16. there is no need for any horizontal disallowance. (6) Forex / Gold Open Position Capital charge on forex/gold position would be computed at 9%.06 0.74 and the sum of short positions in this Zone is (-) 0.500 (5) Equities Capital charge for General Market Risk for equities is 9%.000 For the horizontal disallowance (under Zone 3) For the horizontal disallowances between adjacent zones For the overall net open position (17. This offsetting position of 0. for horizontal disallowance.09 = Nil = Nil It may be mentioned here that if a bank does not have both long and short positions in different time zones.95.29 Between adjacent Zones (Zone 2 & 3) Between Zones 1 and Zone 3 = 0.12. Banks in India are not allowed to take any short position in their books except in derivatives.000 0 16. Therefore.) 1.000 16.9 crore (7) Capital charge for market risks in this example is computed as under: .00.07. Thus the same works out to Rs. Total capital charge for interest rate related instruments is shown below For overall net position For vertical disallowance For horizontal disallowance in Zone 3 For horizontal disallowance in adjacent zones For horizontal disallowance between Zone 1 & 3 Total capital charge for interest rate related instruments 16. except in Zone 3 (7.No 1 2 3 4 5 6 Capital charge For the vertical disallowance (under 3-6 month time band) For the vertical disallowance (under 7.An off-setting position.29 . Thus.3 year time band) 13.27 crore. will be the either the sum of long positions and or the short positions within a Zone.29 is subject to horizontal disallowance as under: With in the same Zone (Zone 3) 30% of 0.30.15 0.30 (4) The total capital charge in this example for general market risk for interest rate related instruments is computed as under: Sl.29 . there is no off-setting position in any other Zone. banks in India will generally not be subject to horizontal disallowance unless they have short positions in derivatives. The sum of long positions in this Zone is 9.00.84) Total capital charge for general market risk on interest rate related instruments (1 + 2 + 3 + 4 + 5) 9.

the capital charge could be converted to risk weighted assets by multiplying the capital charge by (100 ÷ 9).00 2548.33 27.33 for Capital charge for General Market Risk 16. 1240.00 52. Rs.00 111.63 Computing Capital Ratio To facilitate computation of CRAR for the whole book. Therefore.( Rs. 1240.00 9. risk weighted assets for market risk is : Rs.30 27. As in India.33 crore.00 9. Crore) 400.11 1 2 3 4 Total Capital Risk weighted assets for Credit Risk Risk weighted assets for Market Risk Total Risk weighted assets (2+3) .58 5 CRAR [(1÷4)*100] 10.25 1240. crore) Details Interest Rate instruments Equities Forex/Gold Total Related Capital charge Specific Risk 32.30 Total 48. this capital charge for market risks in the Trading Book needs to be converted into equivalent risk weighted assets. (Rs.63*(100 ÷ 9) = Rs. a CRAR of 9% is required.33 3788. 111. i.56 % The reporting format for the purpose of monitoring the capital ratio are given in Annex 3.63 54.00 59.33 crore.e.

3y 10 .2 9 0. 75 2.39.15 0. 77.09 Zone 1 Zone 2 3.4 7 ()0. 9y 1.06 0. 35 1.08 ()0. 0 7 4. 3 y 2. 7 y Zone 3 9.82 1.2 2 0.09 . 2 9 1. 8y 2. 35 1. 75 16.2.612 y Capit al Char ge Position Derivativ es (long) Derivativ es (short) Net Position Vertical Disallowa nce (5%) Horizonta l Disallowa nce 1 (under Zone 3) Horizonta l disallowa nce 2 Horizonta l Disallowa nce3 0.7 7 3. 310 . (b) (3) of Example 2 above) ** 0.72 0.0 1** 2.6 y 1 22 0 y O ve r 20 y Timeband 0-1 mo nth 1-3 mo nth 3-6 mo nth 6 m 1y 1– 1.2 5 0.14 # 0. 63 0. 3 6 2.22 x 5%=0. 51 1.29 x 30%=0. 3 – 5.01 @ 2. 3y 7. 64.79 3.Example for computing the capital charge including the vertical and horizontal disallowances on interest rate related instruments ( Para No 2. 9– 2.6 y 5.79 x 5%=0.09 # 0.14 @ ()3.8 – 3.7 7 2.54 (-) 3. 51 1.72 2. 63 17.30 3.

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