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Capital Requirements, Contingent C, Corporate Separateness

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1. Discuss the new capital requirements for Basel III. What are the additional capital buffers required by Basel III and what new ratios are required to monitor the funding status of banks?

2. What is contingent capital and how can it be beneficial to help solve the debt over hang problem faced by banks during a financial crisis?

3. What is meant by corporate separateness and why is it important? What are the implications for market discipline and capital rationing if corporate separateness is impaired for a bank holding company?

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Solution Summary

This solution explains capital requirement under Basel III. The sources used are also included in the solution.

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The new capital requirements under Basel III are that banks should hold 4.5% of equity capital and 6% of Tier I capital of risk weighted assets. Additional buffers introduced by Basel III are a compulsory capital conservation buffer of 2.5% and a discretionary counter-cyclical buffer which would allow national central banks or regulators to require another 2.5% of capital during period of high growth.

To monitor the funding status of banks the Tier 1 capital is divided by the bank's average total consolidated assets. The new required ratio is 3%. Another new ratio is the liquidity coverage ratio by which the bank is required to hold sufficient high quality liquid assets to cover total net cash outflows over 30 days. Another ratio newly introduced by Basel III is the net stable funding ratio. According to this ratio the amount of stable funding required should exceed the required amount of ...

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