Capital adequacy is a measure of the financial strength of a bank expressed as a ratio of its capital to its risk weighted assets. This ratio…
BBA Financial Markets and Services · 2025 · Solved Question with Answer
Capital adequacy is a measure of the financial strength of a bank expressed as a ratio of its capital to its risk weighted assets. This ratio indicates a bank's ability to maintain adequate capital in the form of equity and subordinated debts to meet any unexpected losses. Directive number 1 of the Unified directives has made provision about the capital adequacy requirement for commercial banks. Under this directive, commercial banks are required to maintain minimum common equity tier I ratio of 6%, Tier I capital ratio of 8.5% and total capital ratio of 11% based on Basel III framework. The following is an extract from the annual report of ABC Bank (Rs in millions)
| Particulars | Amount (Rs) | |
| Paid up capital | ✓ | 8,000 |
| Statutory general reserve | 1,200 | |
| Retained earnings | ✓ | 800 |
| Capital redemption reserve | ✓ | 300 |
| Exchange equalization reserve | 30 | |
| Investment adjustment reserve | ✓ | 200 |
| General loan loss provision | ✓ | 700 |
| Intangible assets | — | 50 |
| Investment in equity of institutions with financial interest | — | 400 |
| Subordinated term debt | ← | 100 |
| Risk weighted balance sheet exposure for credit risk | 65,000 | |
| Risk weighted off balance sheet exposure for credit risk | 16,000 | |
| Risk weighted exposure for operational risk | 3,000 | |
| Risk weighted exposure for market risk | 200 | |
| Adjustment under Pillar II— | 3,000 | |
| Perpetual non-cumulative preference share capita | 50 | |
| Perpetual debt instruments | 70 | |
| Stock premium ↘ | 10 |
a. Calculate additional tier 1 capital, common equity tier 1 (CET 1) and Tier 1 capital.
b. Calculate supplementary capital and total capital of the bank.
c. Calculate total risk weighted exposure.
d. Calculate capital adequacy ratio of the bank. Does the bank have sufficient capital to meet NRB capital requirements?
e. Describe the significance of capital adequacy.