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Basel 1 defines capital based on two tiers:
1. Tier ( core capital) and Tier 2 ( Supplementary capital).
2 According to basel 1, the total capital should represent at least eight percent of the bank's credit risk.
3 in addition, the basel agreement identifies three types of credit risks:
a. the on balance sheet risk
b The trading off balance sheet risk
c The non trading off balance sheet risk
Capital adequacy ratio according to Basel Committee as follows:
Capital (core capital + head cushions and a supplementary money) ≥ 8%
(A) core capital: and consists of shareholders 'equity + declared precautions and general precautions and legal + undistributed profits or retained, and when the capital adequacy calculation excludes goodwill + investments in banks and the financial institutions + mutual investments in the banks' capital
(B) capital cushions or complementary: where precautions include undeclared + revaluation reserves + reserves the face of bad loans + medium-term lending from the shareholders' + securities (stocks and bonds that convert into equity after the period
It should also be noted that impose restrictions on top of cushions money: - That does not exceed the capital cushions 100% of core capital elements. - Subjected to re-evaluation to deduct 55% of the value of reserves. - Have a maximum allocation of constituent to face any risk of non-specific 1.25% of assets and contingent liabilities dangerous weighted. - Have a maximum lending support to 50% of core capital in order not to rely onthese loans concentration
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The capital adequacy framework sets out the approach for the computation of minimum capital required by a banking institution to operate as a going concern entity.
Capital adequacy is determined by using the Capital Adequacy Ratio.
Capital Adequacy Ratio is a measure of the amount of a Bank's Capital expressed as a percentage of its Risk-Weighted Assets and according to Basel1 it must be equal to or greater than8%.
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