Basel Norms and Capital Adequacy
Why banks hold regulatory capital, how risk-weighted assets work, the CRAR formula and its CET1 and Tier 1 sub-ratios, the Basel III minimums and buffers, and RBI's stricter Indian implementation — with a worked capital-adequacy calculation.
What you will be able to do
- Explain why capital is measured against risk-weighted assets, not total assets.
- Write the CRAR formula and identify the CET1, Tier 1 and total-capital layers.
- State the Basel III minimum ratios and the capital conservation buffer, and RBI's stricter figures.
- Compute CRAR and its sub-ratios from capital and RWA figures and judge compliance.
What is inside this lesson
- 1Why banks must hold capital
- 2Risk-weighted assets
- 3The capital adequacy ratio
- 4The capital stack: CET1, AT1, Tier 2
- 5Basel III minimums and buffers
- 6India: RBI's stricter figures
- 7Computing CRAR and checking compliance
- 8Common confusions
- 9Quick revision
- 10Practice
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Why banks must hold capital
When a loan goes bad, the loss is first absorbed by the bank's capital — shareholders' funds and similar instruments that rank behind depositors. Capital is the cushion that lets a bank take losses and still repay depositors, so a regulator's central prudential question is: does this bank hold enough capital for the risks on its books?
The Basel framework, issued by the Basel Committee at the Bank for International Settlements, is the international answer. India applies it through RBI regulations, currently a version of Basel III, which was tightened after the 2008 global financial crisis.
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