Appendix PCD-2 Comprehensive Example of Deductions
Bank "x" with capital base of 10,000,000 before deductions (consisting of 5,000,000 Tier 1 and 5,000,000 Tier 2) has made four investments listed below along with the amount required to be deducted from the capital for capital adequacy purposes:
| Investment | Amount |
Deduction requirement (For rules refer to chapter PCD-2) |
| Bank "a" | 1,000,000 | 1,000,000 |
| Insurance entity "b" | 3,000,000 | 3,000,000 1 |
| Commercial entity "c" | 2,000,000 | 500,000 2 |
| Entity "d" | 500,000 | 400,000 3 |
| Total | 6,500,000 | 4,900,000 |
Determination of eligible subordinated debt as Tier 2 capital:
| Tier 1 | = | 5,000,000 |
| Goodwill | = | 100, 000 4 |
| Tier 1 after deduction of goodwill | = | 4,900,000 |
| Eligible subordinated debt (50% of above) | = | 2,450,000 (However, as this amount can only be a part of Tier 2, the eligible amount of Tier 2 also needs to be observed. See below) |
Determination of eligible Tier 1 and Tier 2 capital:
| Tier 1 capital | Tier 2 capital | |
| Capital base | 5,000,000 | 5,000,000 |
| Goodwill | (100,000) | - |
| Reciprocal cross-holding 5 | (400,000) | - |
| Other deductions (Equally from Tier 1 and Tier 2) | ||
| (4,900,000 - 500,000=4,400,000/2) | (2,200,000) | (2,200,000) |
| Resulting capital | 2,300,000 | 2,800,000 |
| Eligible capital | 2,300,000 | 2,300,000 6 |
Accordingly, limit for subordinated debt will automatically be reduced to 2,300,000.
Calculation of CAR:
CAR = Eligible capital/Risk-Weighted Assets
= (2,300,000 + 2,300,000)/(Say)40,000,000 = 4,600,000/40,000,000 = 11.5%
1This investment is 30% of the insurance "b" capital.
2This investment is 20% of the bank's capital. As such the amount exceeding 15% i.e. 500,000 will be deducted.
3This investment is 2% of entity "d"s capital. Entity "d" has also made investment in Tier 1 capital of Bank "x" amounting to 400,000. This amount (400,000), being cross-holding, is required to be deducted from regulatory capital of the bank "x".
4This represents goodwill arising at the time of acquisition of a consolidated subsidiary.
5As this cross-holding exists in Tier 1 capital (see footnote 3), this amount must be deducted from the same tier.
6Tier 2 can not exceed 100% of Tier 1 (after all subsequent deductions).