What is regulatory capital? State the composition of regulatory capital for banks under Basel III norms.

Answer 6 Regulatory Capital: Regulatory capital is the amount of risk capital held by financial services company to enable them to survive any difficulties such as market or credit risks. One of the key principles of supervisory review identified by the Basel Committee on Banking Supervision (BCBS) is that the Supervisors should ensure that the banks maintain and operate above the minimum regulatory capital ratios. Under the Basel II framework, the total regulatory capital comprises of Tier 1 (core capital) and Tier 2 capital (supplementary capital). In order to improve the quality and quantity of regulatory capital, capital will predominantly consist of common Equity under Basel III. Non equity Tier 1 and Tier 2 capital would continue to form part of regulatory capital subject to eligibility criteria as prescribed under Basel III capital regulations on an ongoing basis. The total regulatory capital fund will consist of the sum of the following categories- (i) Tier 1 Capital (Going concern capital*) Comprises of :- (a) Common Equity Tier 1 capital (b) Additional Tier 1 capital (ii) Tier 2 Capital (Gone concern capital**) (*from regulatory capital perspective, going -concern capital is the capital which can absorb losses without triggering bankruptcy of the bank.) (** Gone concern capital is the capital which will absorb losses only in a situation of liquidation of the bank.)