Bank Management

Regulatory Capital
and the Supervision
 1. To absorb unanticipated losses with
enough margin

2. To protect uninsured depositors,

bondholders, and creditors

Functions of 3. To protect FI insurance funds and the

capital taxpayers

4. To protect the FI owners

5. To fund the branch and other real

investments
 Capital regulation -
major support in
banking system

Capital
Regulation
USA 18th and 19th
century-minimum
level of capital to start

and
and rules are vary by
the state

supervision in Modern idea-

requiring capital based

USA and on the size and risk of

the bank

Europe 1 January 2014 all EU

member - implement
rules that are consist
of regulation
 Capital requirements regulation – CRR

Capital
Directive - capital requirements directive –
Regulation CRD IV.
and
supervision in CRR -capital requirements, liquidity
requirements, leverage ratio and the role
USA and of Council in CRR.
Europe CRD IV - capital buffers, capital
conservation buffer, countercyclical capital
buffer and systematic risk buffer.
 Basel Committee on Banking Supervision
(BCBS) is created by group of G-10 countries
in Bank for International Settlements in Basel
Basel – As
the main Final version of Basel I was released in July
regulator 1988.

The major function of Basel I is introduction

of risk – weighted assets (RSA)
 Basel I has been created from fears that a straight
capital ratio didn’t depend on an asset’s risk

Basel has made no distinction between a bank with

loans to major corporations and AAA rated bonds

Capital adequacy requirements might have more

Basel I encourage banks to take more risk,

And getting a higher return for the same amount of

capital

Main function of Basel I approaches was to make

difference of assets from one to five categories of
credit risk
• By definition Basel I is defined two tiers of capital: Tier 1 and Tier 2
• Tier 1 capital is combined of stockholders equity capital and preferred stock
• Difference between Tier 1 and Tier 2 is that Tier 2 is composed of all other assets.
• Capital adequacy requirements are based on a minimum ratio of capital to risk-
weighted assets
• 

• The required capital is based on the risk adjusted exposure:

• Based on the risk-adjusted exposure, the capital requirements are determined by the following:
Basel II
• Basel I has its own weaknesses as only one credit risk
• internationally community started to work on another Basel called Basel II.
• Basel II didn’t change the minimum capital level, but it made a huge changes in
way RWA was calculated
• Basel II is established of 3 pillars;
1. minimum capital requirements
2. supervisory review of capital
3. market discipline.
•1  st pillar is about minimum capital requirements based on risk that is more
detailed than in Basel I.
• 2nd pillar is the supervisory approach to capital allocation and
• 3rd pillar is about of increasing disclosure
• The ratio of the bank's capital and reserves must meet or exceed a percentage of
the risk-weighted assets:
Basel III
• 
• After crises happened in 2008, in December 2010 Basel III has started
• Needs for new Basel was derived from the weaknesses of capital adequacy requirements.
• New standards starts;
I. banks are required to have increased liquidity coverage ratio,
II. capital has to be maintained as a percentage of all asset,
III. largest global banks will require 9,5% core tier 1 ratio before pays dividend
• Banks must also maintain a minimum liquidity, as measured by the liquidity coverage ratio
Supervision of the banks
Role of the Central Bank
promote,
establish and
maintain
appropriate
payment and
systems

receive deposits
from
coordinate the
commercial
activities of the
banks to meet
agencies
the reserve
requirements

organizing
establish and
facilities for the
maintain an
clearing and
information
settlement of
network for the
interbank
financial system
payments
Role of the Banking agencies

FBA
(Banking Agency ABRS
of the (Banking Agency
Federation of of Republika
Bosnia and Srpska)
Herzegovina)
BANKING Initial capital of a bank
LAW
("Official Bank shares
Gazette of the
Federation of Prohibited actions
BiH",
number: Regulatory capital adequacy
27/17)
No payments
 Examination on a consolidated
SUPERVISION basis;
OF BANKS AND
PROCEDURES
OF THE Upholds trust in the banking
BANKING system,preserve its safety and
AGENCY OF stability
THE
FEDERATION Includes verification of lawfulness,
OF BOSNIA AND quality, efficiency, stability and
HERZEGOVINA safety of banking operations
 ASSESS RISKS TO WHICH IF NECESSARY -
BANKS ARE OR MIGHT BE INTENSIFIED

Supervision EXPOSED; SUPERVISION;

activites

CHECK AND EVALUATE

Examination types

On-site Off-site
examination examination
 Examination report

Report delivery

Examination
Report amendment

Termination of the examination process

 Written
warning

Imposing a Written
fine order

SUPERVISORY
MEASURES

Warning to Revocation
management of a banking
board license
members
• Thank you!