Statutory Liquidity Ratio
The ratio of liquid assets to net demand and time liabilities (NDTL) is called statutory liquidity ratio (SLR).
Description: Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. Treasury bills, dated securities issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated.
The ratio of liquid assets to net demand and time liabilities (NDTL) is called statutory liquidity ratio (SLR).
Description: Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. Treasury bills, dated securities issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated.
🧰Basel Committee on Banking Supervision (Basel III)🧰
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974. The committee expanded its membership in 2009 and then again in 2014. In 2019, the BCBS has 45 members from 28 Jurisdictions, consisting of Central Banks and authorities with responsibility of banking regulation. It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Committee frames guidelines and standards in different areas – some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross-border banking supervision. The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. The Bank for International Settlements (BIS) hosts and supports a number of international institutions engaged in standard setting and financial stability, one of which is BCBS. Yet like the other committees, BCBS has its own governance arrangements, reporting lines and agendas, guided by the central bank governors of the Group of Ten (G10) countries.
Basel III (or the Third Basel Accord or Basel Standards) is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. This third installment of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.
Basel III was agreed upon by the members of the Basel Committee on Banking Supervision in November 2010, and was scheduled to be introduced from 2013 until 2015; however, implementation was extended repeatedly to 31 March 2019 and then again until 1 January 2022.
Overview
The Basel III standard aims to strengthen the requirements from the Basel II standard on bank's minimum capital ratios. In addition, it introduces requirements on liquid asset holdings and funding stability, thereby seeking to mitigate the risk of a run on the bank.
Key principles
Capital requirements
The original Basel III rule from 2010 required banks to fund themselves with 4.5% of common equity (up from 2% in Basel II) of risk-weighted assets (RWAs). Since 2015, a minimum Common Equity Tier 1 (CET1) ratio of 4.5% must be maintained at all times by the bank.
The minimum Tier 1 capital increases from 4% in Basel II to 6%,[4] applicable in 2015, over RWAs.[5] This 6% is composed of 4.5% of CET1, plus an extra 1.5% of Additional Tier 1 (AT1).
Furthermore, Basel III introduced two additional capital buffers:
A mandatory "capital conservation buffer", equivalent to 2.5% of risk-weighted assets. Considering the 4.5% CET1 capital ratio required, banks have to hold a total of 7% CET1 capital ratio, from 2019 onwards.
A "discretionary counter-cyclical buffer", allowing national regulators to require up to an additional 2.5% of capital during periods of high credit growth. The level of this buffer ranges between 0% and 2.5% of RWA and must be met by CET1 capital.
Leverage ratio
Basel III introduced a minimum "leverage ratio". This is a non-risk-based leverage ratio and is calculated by dividing Tier 1 capital by the bank's average total consolidated assets (sum of the exposures of all assets and non-balance sheet items).[6][7] The banks are expected to maintain a leverage ratio in excess of 3% under Basel III.
In July 2013, the U.S. Federal Reserve announced that the minimum Basel III leverage ratio would be 6% for 8 Systemically important financial institution (SIFI) banks and 5% for their insured bank holding companies.
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974. The committee expanded its membership in 2009 and then again in 2014. In 2019, the BCBS has 45 members from 28 Jurisdictions, consisting of Central Banks and authorities with responsibility of banking regulation. It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Committee frames guidelines and standards in different areas – some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross-border banking supervision. The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. The Bank for International Settlements (BIS) hosts and supports a number of international institutions engaged in standard setting and financial stability, one of which is BCBS. Yet like the other committees, BCBS has its own governance arrangements, reporting lines and agendas, guided by the central bank governors of the Group of Ten (G10) countries.
Basel III (or the Third Basel Accord or Basel Standards) is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. This third installment of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.
Basel III was agreed upon by the members of the Basel Committee on Banking Supervision in November 2010, and was scheduled to be introduced from 2013 until 2015; however, implementation was extended repeatedly to 31 March 2019 and then again until 1 January 2022.
Overview
The Basel III standard aims to strengthen the requirements from the Basel II standard on bank's minimum capital ratios. In addition, it introduces requirements on liquid asset holdings and funding stability, thereby seeking to mitigate the risk of a run on the bank.
Key principles
Capital requirements
The original Basel III rule from 2010 required banks to fund themselves with 4.5% of common equity (up from 2% in Basel II) of risk-weighted assets (RWAs). Since 2015, a minimum Common Equity Tier 1 (CET1) ratio of 4.5% must be maintained at all times by the bank.
The minimum Tier 1 capital increases from 4% in Basel II to 6%,[4] applicable in 2015, over RWAs.[5] This 6% is composed of 4.5% of CET1, plus an extra 1.5% of Additional Tier 1 (AT1).
Furthermore, Basel III introduced two additional capital buffers:
A mandatory "capital conservation buffer", equivalent to 2.5% of risk-weighted assets. Considering the 4.5% CET1 capital ratio required, banks have to hold a total of 7% CET1 capital ratio, from 2019 onwards.
A "discretionary counter-cyclical buffer", allowing national regulators to require up to an additional 2.5% of capital during periods of high credit growth. The level of this buffer ranges between 0% and 2.5% of RWA and must be met by CET1 capital.
Leverage ratio
Basel III introduced a minimum "leverage ratio". This is a non-risk-based leverage ratio and is calculated by dividing Tier 1 capital by the bank's average total consolidated assets (sum of the exposures of all assets and non-balance sheet items).[6][7] The banks are expected to maintain a leverage ratio in excess of 3% under Basel III.
In July 2013, the U.S. Federal Reserve announced that the minimum Basel III leverage ratio would be 6% for 8 Systemically important financial institution (SIFI) banks and 5% for their insured bank holding companies.
🔷Banking Awareness Study Notes on Moral Suasion
Moral suasion refers to an appeal to morality to change or influence behaviour. Moral suasion under economics is defined as the attempt to coerce private economic activity through government exhortation in ways not already defined or dictated by existing statute law.
The Reserve Bank of India (RBI) uses moral suasion as a qualitative instrument of monetary policy, unlike statutory liquidity ratio or cash reserve ratio.
Moral Suasion is a request by the RBI to the commercial banks to take specific measures as per the economy’s trends. For instance, RBI may direct banks not to give out certain loans. It includes psychological means and informal means of selective credit control.
The ‘moral’ element comes from the pressure for ‘moral responsibility’ to function in a way that aligns with furthering the good of the economy. Moral suasion in a narrow sense may sometimes be known as jawboning.
There are two types of moral suasion:
“Pure” moral suasion refers to an appeal for altruistic behaviour and is not used often in economic policy.
“Impure” moral suasion is often referred to as “moral suasion” in economics. It is supported by explicit or implicit threats by authorities to provide incentives to adhere to the authorities’ commands.
Features of Moral Suasion
Moral suasion has gained significance in developed countries as an efficient monetary policy instrument. To better understand this concept, let us figure out its critical elements:
➖Qualitative Tool: It is a qualitative tool used for price stability and growth of an economy through credit control.
➖Act of Persuasion: It is all about changing the mind and influencing the stakeholders such that they cooperate to the policy instruments by themselves, without any use of force or pressure.
➖Directed by Central Bank: For economic welfare and interest, the central bank directs and persuades the commercial banks to adhere to the monetary and credit policy instruments.
➖Monetary Policy Instrument: The principal intention of moral suasion is to gain cooperation from the stakeholders to adhere to specific policies and guidelines.
➖Seeks Cooperation: It is not related to enforcing the stakeholders to follow the decisions. Instead, it is an act of convincing them to cooperate and adhere to the policy instruments willingly.
Moral suasion refers to an appeal to morality to change or influence behaviour. Moral suasion under economics is defined as the attempt to coerce private economic activity through government exhortation in ways not already defined or dictated by existing statute law.
The Reserve Bank of India (RBI) uses moral suasion as a qualitative instrument of monetary policy, unlike statutory liquidity ratio or cash reserve ratio.
Moral Suasion is a request by the RBI to the commercial banks to take specific measures as per the economy’s trends. For instance, RBI may direct banks not to give out certain loans. It includes psychological means and informal means of selective credit control.
The ‘moral’ element comes from the pressure for ‘moral responsibility’ to function in a way that aligns with furthering the good of the economy. Moral suasion in a narrow sense may sometimes be known as jawboning.
There are two types of moral suasion:
“Pure” moral suasion refers to an appeal for altruistic behaviour and is not used often in economic policy.
“Impure” moral suasion is often referred to as “moral suasion” in economics. It is supported by explicit or implicit threats by authorities to provide incentives to adhere to the authorities’ commands.
Features of Moral Suasion
Moral suasion has gained significance in developed countries as an efficient monetary policy instrument. To better understand this concept, let us figure out its critical elements:
➖Qualitative Tool: It is a qualitative tool used for price stability and growth of an economy through credit control.
➖Act of Persuasion: It is all about changing the mind and influencing the stakeholders such that they cooperate to the policy instruments by themselves, without any use of force or pressure.
➖Directed by Central Bank: For economic welfare and interest, the central bank directs and persuades the commercial banks to adhere to the monetary and credit policy instruments.
➖Monetary Policy Instrument: The principal intention of moral suasion is to gain cooperation from the stakeholders to adhere to specific policies and guidelines.
➖Seeks Cooperation: It is not related to enforcing the stakeholders to follow the decisions. Instead, it is an act of convincing them to cooperate and adhere to the policy instruments willingly.
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☑️Banking Awareness Study Notes on Net Demand and Time Liabilities (NDTL)
Demand and Time Liabilities (DTL) and The Net Demand and Time Liabilities (NDTL) are two terms openly pop up in connection with monetary review policy of RBI and liquidity in market. Banks are in the business of accepting deposits and deploying these funds by way of lending and thereby earning profit in the process. The resources mobilesd by the bank for lending are its liabilities. Liabilities of a bank can be classified broadly into three categories; demand liabilities, time liabilities and other demand and time liabilities (ODTL). Demand and time deposits from public form the largest share of bank’s liabilities.
NDTL stands for Net Demand & Time Liability. It helps us to calculate CRR and SLR. We know that CRR and SLR are used by the Reserve Bank of India as tools to control inflation.
Liabilities of a bank are defined under Section 42 of the RBI Act, 1934. As per this definition, liabilities of a bank may be towards the banking system or towards others in the form of demand and time deposits or borrowings or other miscellaneous items of liabilities. Further, Section 42(1C) of the RBI Act, 1934, empowers Reserve Bank of India (RBI) to specify whether any transaction or class of transactions would be regarded as a liability of banks in India.
Demand Liability is a type of liability that is payable on demand. When you deposit your money in savings accounts or current accounts of a bank, it is a liability for the bank to repay it back to you whenever you demand it to do so. Therefore, Savings accounts, Current accounts, Demand Drafts, etc. fall under the ‘Demand Liabilities’ of a bank.
Then comes the term Time liability. Time liability is a type of liability that is payable after a term or time period. In other words, it has a fixed term or time period to mature. When you deposit your money in Fixed deposits, Recurring deposits, Gold deposits, etc. the bank is liable to pay it with interest at the time of its maturity. There is a fixed term for such products and they are liabilities for the bank. Therefore, Fixed deposits, Recurring deposits, Gold deposits, etc. fall under the ‘Term Liabilities’ of a bank.
Next comes the term ‘ODTL’. ODTL stands for Other Demand and Term Liabilities. Those liabilities that do not fall under the above two categories ‘Demand Liability’ and ‘Term Liability’ is called ODTL. The interest accrued on deposits, unpaid dividends to shareholders, etc. fall under Other Demand and Term Liabilities.
Demand and Time Liabilities (DTL) and The Net Demand and Time Liabilities (NDTL) are two terms openly pop up in connection with monetary review policy of RBI and liquidity in market. Banks are in the business of accepting deposits and deploying these funds by way of lending and thereby earning profit in the process. The resources mobilesd by the bank for lending are its liabilities. Liabilities of a bank can be classified broadly into three categories; demand liabilities, time liabilities and other demand and time liabilities (ODTL). Demand and time deposits from public form the largest share of bank’s liabilities.
NDTL stands for Net Demand & Time Liability. It helps us to calculate CRR and SLR. We know that CRR and SLR are used by the Reserve Bank of India as tools to control inflation.
Liabilities of a bank are defined under Section 42 of the RBI Act, 1934. As per this definition, liabilities of a bank may be towards the banking system or towards others in the form of demand and time deposits or borrowings or other miscellaneous items of liabilities. Further, Section 42(1C) of the RBI Act, 1934, empowers Reserve Bank of India (RBI) to specify whether any transaction or class of transactions would be regarded as a liability of banks in India.
Demand Liability is a type of liability that is payable on demand. When you deposit your money in savings accounts or current accounts of a bank, it is a liability for the bank to repay it back to you whenever you demand it to do so. Therefore, Savings accounts, Current accounts, Demand Drafts, etc. fall under the ‘Demand Liabilities’ of a bank.
Then comes the term Time liability. Time liability is a type of liability that is payable after a term or time period. In other words, it has a fixed term or time period to mature. When you deposit your money in Fixed deposits, Recurring deposits, Gold deposits, etc. the bank is liable to pay it with interest at the time of its maturity. There is a fixed term for such products and they are liabilities for the bank. Therefore, Fixed deposits, Recurring deposits, Gold deposits, etc. fall under the ‘Term Liabilities’ of a bank.
Next comes the term ‘ODTL’. ODTL stands for Other Demand and Term Liabilities. Those liabilities that do not fall under the above two categories ‘Demand Liability’ and ‘Term Liability’ is called ODTL. The interest accrued on deposits, unpaid dividends to shareholders, etc. fall under Other Demand and Term Liabilities.
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