CHAPTER 9

Sub-topics

Capital Adequacy Framework

Liquidity Management

Asset Quality

Performance Evaluation
Risk-based capital approach

 To measure banks performance

 Measure capital  relating amount of capital
to the risk-weighted assets
 based on Basel Accord (agreed by Basel
Committee on bank Supervision)
 focus on capital adequacy of financial
institutions where assets are categorized
according to various risk level  0 %, 10 %,
20 %, 50 %, 100 % categories
 Can be short, medium or long term deposits
2 capital adequacy ratios:
Risk-weighted capital ratio (RWCR):

Risk-weighted capital Ratio = capital base

Risk-weighted assets
 
 
Core capital ratio (CCR):
 
 
Core Capital Ratio = Tier 1 capital
Risk-weighted assets
 
Illustration (RWCR)
Risk weight Principal Risk-weighted
category RM ‘000 RM ‘000
(a) (b) (a) X (b)
0% 11,000,000 0
10 % 3,000 300
20 % 7,000,000 1,400,000
50 % 9,000,000 4,500,000
100 % 40,000,000 40,000,000
Risk-weighted Assets = 45,900,300
Illustration…continue

 Assuming the capital base* (tier 1 + tier 2

capital) = RM 7,500,000, then:
The RWCR of the bank = 7,500,000
45,900,300
= 16.33 %

* Capital base of a bank can be derived from the Footnotes to

Financial Statements
Performance measurement of
bank
Liquidity Management
Sources of liquidity:
Assets and Liability
Management
Goals  to manage bank’s assets and liabilities to
balance its many risk exposures and help achieve
its operating objectives
How?
(1)Manage Liquidity  (a) holding easily liquidated
assets (b) acquire stable liabilities (c) creating
line of credit with other institutions
(2)Manage market risks  focusing interest rate
changes; int. rate changes will affect value of
interest-bearing assets and liabilities
Scenarios to be addressed by a bank’s
assets/liability committee or risk
management team:

 Unexpected large withdrawals of

deposits ?
 Loan repayment earlier than expected ?
 Sudden rise and big margin increase in
interest rate (100 basis point or 1 %) ?