CA-2.4 CA-2.4 Calculation of the capital ratio
CA-2.4.1
A bank should start the calculation of the capital ratio with the measure of market risk (i.e. specific risk plus general market risk) in accordance with the regulations in this Module, including interest rate risk, equity risk, foreign exchange and
commodities risks.October 07CA-2.4.2
The bank should next calculate its credit risk-weighted assets in accordance with the regulations in this Module.
October 07CA-2.4.3
The next step is to create an explicit numerical link between the capital requirements for credit and market risks. This is accomplished by multiplying the measure of market risk (calculated as stated in Paragraphs CA-2.4.1 and CA-2.4.2above) by 12.5 and adding the resulting figure to the sum of the credit risk-weighted assets. The capital ratio will then be calculated in relation to the sum of the two, using as the numerator only the eligible capital.
October 07CA-2.4.4
In calculating the eligible capital, it will be necessary first to calculate the bank's minimum capital requirement for credit risk, and only afterwards its market risk requirement, to establish how much tier 1 and tier 2 capital is available to support market risk. Eligible capital will be the sum of the whole of the bank's tier 1 capital, plus tier 2 capital under the limits set out in Section CA-2.3 above. Tier 3 capital will be regarded as eligible only if it can be used to support market risks under the conditions set out in Section CA-2.2 and CA-2.3 above. The quoted capital ratio will thus represent capital that is available to meet both credit risk and market risk. Where a bank has tier 3 capital, which meets the conditions set out in Section CA-2.2 above and which is not at present supporting market risks, it may report that excess as unused but eligible tier 3 capital alongside its capital ratio. A worked example of the calculation of the capital ratio is set out in Appendix CA-1.
October 07
