[ CASH RESERVE RATIO, STATUARY RESERVE RATIO. Capital Adequacy Ratio Formula and Explanation. Senior Bond. Subordinated bond. Hybrid Capital]
I don't like drama. So, let us dive into this topic specifically.
CRR is Cash Reserve Ratio:
Cash reserve is a reserve that has to be kept in central bank and the bank doesn't get any interest for depositing an amount of cash in the central bank. The central bank set the ratio on the amount of difference between demand deposit and term deposit. The main intention of CRR is to control the cash supply in economy by narrowing range of loan of banks.
SLR is Statuary Reserve Ratio:
Statuary reserve is a reserve that has to be kept as government bond. The bank must purchase government bond to preserve the ability to pay the money whenever the depositor ask the bank to return his money. The bank get interest rate on this reserve.
Demand Deposits:
A demand deposit is a deposit that is kept by the banks and have to pay back when the depositor want the deposited money back. The amount of aggregated money depends on the terms and condition of the deposit. Examples : Current Account Deposit, Saving Account, Special Note Deposit
Term or Time Deposit:
A term deposit is a deposit which the bank returns to the depositors with interest after a fixed time. For Example: Fixed Deposit, Recurring Deposit etc.
CAR is Capital Adequacy Ratio:
This term represents the ratio of banks capital to its risky assets. For example a bank gave loan which is an asset for banks. It turns out to be a risky asset as the loan was due for 3 month. This is called risk weighted asset because he may get the money after 4 month.
According to Basel 2, CAR should be 8% and according to Basel 3, CAR should be 10.5%.
Formula: (Tier 1 capital + Tier 2 Capital)/ Risk Weighted Asset
Explanation of Formula:
Tier 1 Capital: All Reserve and Funds+ Common Stock
Tier 2 Capital: (Supplementary Capital which can absorb losses in the event of winding up and so provides a lesser degree of protection to depositors) = Revaluation Reserve ( Building Owned by the Bank) + General Provision (For undermined loss amount) + Hybrid Capital ( Mixed Characteristics of both debt and equity instruments such as preferred stocks + Subordinate term bond/ debt {Paid after senior debt (Debt backed by security), unsecured debt.}
According to Basel 3 Tier 2/ Risk Weighted Asset = 12.9 %
This is all for today, I hope this lesson was useful. If you don't understand, please comment.
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