250-bps rise in yield curve to lower system-level CRAR

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Mumbai | Updated: June 27, 2018 3:39:51 AM

At present, minimum capital requirement, including capital conservation buffer (CCB), stands at 10.875% (9% minimum total capital plus 1.875% of CCB as on March 31, 2018).

Reserve Bank of India said in its Financial Stability Report (FSR).

Taking into account the investments under available for sale (AFS) and held for trading (HFT) categories by banks, an upward shift of 250 basis points (bps) in the yield curve will lower their capital to risk weighted assets ratio (CRAR) by about 126 bps at the system level, the Reserve Bank of India said in its Financial Stability Report (FSR) on Tuesday.

“At the disaggregated level, six banks accounting for 9.9% of the total assets could be impacted adversely with their CRAR falling below 9%,” it said, adding that the assumed shock of a 250 bps upward shift of the yield curve on the held to maturity (HTM) portfolios of banks, if marked-to-market (MTM), will reduce the CRAR by about 260 bps. This, the report added, will result in the CRAR of 16 banks falling below 9%.

At present, minimum capital requirement, including capital conservation buffer (CCB), stands at 10.875% (9% minimum total capital plus 1.875% of CCB as on March 31, 2018).

Meanwhile, yields on 10-year benchmark sovereign debt moved from 7.3% on January 1, 2018 to 7.8% on May 14, 2018.

This, according to the report, translates into an approximately 25 bps decline in system-wide CRAR (given their asset positions and durations as at end-March 2018).

“CRAR of two banks may fall below the minimum regulatory requirement of 9%, assuming that they do not spread out their losses across the four quarters,” it added.

On the equity price risk context, the FSR pointed out that if there was a 55% drop in equity prices, the system-wide CRAR would fall 40 bps.

Consequently, there will be three banks which will have lower-than-necessary regulatory capital.

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