Draft Prudential Standards - Assignment Example

Draft Prudential Standards Name Affiliation Q1. Briefly outline what are the capital related draft standards Capital Draft Standards These are standards used by banking and other financial organizations both unregulated and regulated used for the control of the banking and securities entities. Capital standards are set of rules and regulations set aside to guide the running of these institutions in the care of the people. Thus without these regulation the consumers would be overexploited (Basel Committee, 2003). Capital Standards Constituents The core capital (Tier 1) With accordance to the committee the key element of capital that faces the great emphasis is equity capital. This type of capital is most common to all the banking and insurance system in mostly all countries in the global, thanks to the international capital regulatory bodies. This type of capital on the draft standards is mostly seen in the published accounts for both limited and unlimited companies and also to private and public companies as it’s also an important component to the profit margins since it determines the banks ability to compete. The emphasis imposed to Equity capital by APRA shows the importance of the board This type of capital standards have some intrinsic qualities as published retained earnings but according to international agreed standards its lacks facts and transparency. This is the reason as to why many countries eliminate it from core equity capital elements. Revaluation Reserves Accounting arrangements and national regulatory bodies in some countries do allow the assessment of some values to be revalued in order to reflect their current values. Capital Credit Risk Standards The other capital Credit risk Standards is internal rating based approach that is based on the banks approvals. This helps the banks to utilize there internal credit systems for measuring the credit risk. According to insurers, the APRA proposal on the alienation of the capital requirement to be inline with the policy intent of regulatory capital model that ensures that there is sufficient capital to reduce the probability of one year horizon failure to 0.5%. In addition the capital standard is important in finding the vertical requirements in determining the treaty limits. Capital management The internal Capital Adequacy Assessment process contains the following conditions for a fair running: i. It must have enough measures and procedures that manage and monitor the risks that come from ADIs activities. It should have a capital management plan that is used to manage the levels of the ongoing business basis. For to manage the ongoing basis, there is an ADIs method that is used to maintain adequate level over time. The minimum Capital Requirements The PCR ratio is 8% of the total risk assets; half of the risk asset must be on the Tier 1 capital. While the capital is under the risk based capital ratio. That is: Risk based capital ratio = capital base Total risk-weighted assets Reduction in Capital For the ADI to perform it has to take written consent for it to make any planned capital reduction. The reasons for the prudential Standards for the plan reduction of an ADI capital include: i. Repurchase, buyback, redemption or repayment of qualification of capital instruments Tier 1 and Tier 2 that is given out by the ADI. ii. Trading of the ADI capital instruments out of the prescribed agreement that is agreed by the APRA. iii. Any kind of payments of dividends of ordinary shares that may exceed after tax earnings. This is obtained after deduction of senior capital instruments. Q2. Briefly outline what are the liquidity related draft standards Liquidity means: This is the amount of capital that is ready available for spending and investment in a business. Mostly used capital is in credit than cash. This is seen in most of the companies like using borrowed money to finance there businesses. In addition, this is also seen with the consumers who prefer using credit cards than debit cards. When there exits a high liquidity then the return means there is a lot of capital. Low interest rates results to cheap credit that eventually translates to low risk of borrowing (Basel Committee, 2005). Liquidity facility This is a facility given by an ADI to other entities for the purpose of funding cash flow or shelter the incapability of the entity to get funding as a result of market disruption. Financial institution This is an organization that provides financial services involving the management of money. This may include finance companies, banks, credit unions, money market corporations, insurance companies, hedge funds, and prime brokers. The objectives and the aims of prudential Standards Is to ensure that allowed deposit making institutions (ADIs) adopt judicious practices in managing their liquidity risks as well as maintaining enough levels of liquidity to meet its functions since it falls in line with different range of operating conditions that includes harsh liquidity stress. The requirement of these prudential standards is that an authorized deposit taking organization must maintain a huge funding structure that is suitable for its activities, uphold a record of high quality asset adequate to enable institutions to resist liquid stress, and to have a risk management framework that can be able to manage, monitor and measure liquidity risk (Basel Committee, 1996). Liquidity Management Framework This kind of risk must be documented for the ADI operations in financial system. Liquidity risk should be reviewed so as to imitate funding capacity and financial condition. The liquidity framework should set up the organization structure on level 1 and level 2 basis and it also defines the roles and responsibility in managing liquid risks. In addition, the frame work must contain and maintain sufficient liquidity containing a cushion of unencumbered. The liquid management standard strategy includes specific liquidity management Q3. In your opinion, what impact would the new capital standards have on the ADIs if the draft is approved? With the increase in the levels of earnings, the High Quality of capital Assets will have an impact to the ADI by increasing the cost. For some of the banks the cost can be reduced if it has the ability to access covered the Treasury bond and bill market (Basel Committee, 1986). The details of the capital facility that is established to help the banks meet capital standards is going to be released if the draft is approved. This will allow the banks and other financial institutions to be able to access credit facilities using the capital available as the security. Making the ADI risk levels to low. Q4. In your opinion, what impact would the new liquidity standards have on the ADIs if the draft is approved? The implications and the impacts of the liquidity drafts to ADI’s include the following: When there is an increase in the levels of earnings, the High Quality Liquid Assets will have an impact to the ADI by increasing the cost of the compressed and cost of the carry margins. (NIM). For some of the banks the cost can be reduced if it has the ability to access covered bond market. The details of the liquidity facility that is offered by RBA which is established to help the banks meet LCR is going to be released if the draft is approved. This will allow the commitment fee to be set at a flat rate regardless of the credit rating of the ADI hence it will result in the withdrawal of 25 points on the RBA cash rate eventual this will allow the ADI to have access to all facilities at the same cost. The APRA will exercise the national discretion on the number of products if the draft is approved. This will have an impact on the ADI whereby it will deeply depend on the business model as well as the product offering having challenges and blessing for all circumstances and conditions. There is an expectation of the product pricing and strategy that will lead to shifts and innovations in margins (Balin, 2008). Unlike other capital requirements, APRA will not bring forward the liquidity rules. The quantitative liquidity coverage ratios will remain at 2015 while the net stable funding will be at 2018. The qualitative aspects will have concern with the case scenarios in banks and will be applicable to ADI’s including the foreign ones. As a result the impacts will be to those that need to adopt the liquid holding approaches since they have to get along with the prudential standards. Implementation of the draft will lead to high scrutiny of the liquidity risk management frameworks and practices, funding of the contingencies plans, and stress testing. This will reflect to as international show whereby the ADI will implement an internal liquid adequacy assessment that is similar to capital ICAAP (Association of Mortgage Banks, 2010). If the draft is implemented, the ability of the ADI to classify the liabilities will be driven to run of assumptions. This will ensure that the ADI is able to organize stable retail deposits (Basel Committee, 2010c). Read More