This blog is to refresh the meanings of central banking terminologies for the CAIIB Elective paper – Central Banking Attempt 2023.


Capital funds Owners’ Equity Deposit. The basic approach of the capital adequacy framework is that a bank should have sufficient capital to provide a stable source to absorb any losses arising from risks in its business. The capital is divided into different levels according to the characteristics/quality of each qualified instrument. For supervisory purposes, capital is divided into two categories: Tier I and Tier II.
Tier I Capital A term used to denote one of the components of regulatory capital. It consists primarily of share capital and reported reserves (minus goodwill, if any). Tier I items are considered the highest quality because they are fully available to cover losses. That is why it is also called share capital.
Tier II capital It refers to one of the components of regulatory capital. Also known as ancillary capital, it consists of certain reserves and certain types of subordinated debt. Tier II items qualify as regulatory capital to the extent that they can be used to absorb losses arising from the bank’s operations. 
Revaluation reserves Funds from revaluation are part of Tier-II capital. These reserves arise from the revaluation of assets that are undervalued in the bank’s accounting, typically bank premises and marketable securities. The extent to which revaluation reserves can be relied upon as a buffer against unexpected losses depends primarily on the degree of certainty that can be placed on estimates of the market values ​​of the relevant assets and subsequent deterioration in values ​​under difficult market conditions or forced sales.
Capital reserves The portion of a company’s profits that is not paid out as dividends to shareholders. They are also known as non-distributable reserves and are plowed back into the business.
Deferred tax asset Unabsorbed depreciation and loss carry forwards that can be set off against future taxable income, which are treated as timing differences, result in deferred tax assets. Deferred tax assets are accounted for in accordance with accounting standard 22.
Deferred tax liabilities Deferred tax liabilities have the effect of increasing income tax payments in the next year, indicating that they are deferred income taxes and meet the definition of a liability.
Subordinated debt Refers to debt status. In the event of bankruptcy or liquidation of the debtor, the subordinated debt has a secondary right to repay after the repayment of another debt.
Hybrid debt equity instruments A number of equity instruments that combine certain features of equity and certain features of debt fall into this category. Each has a special feature that can be considered to affect its quality as capital. If these instruments bear a close resemblance to equity, in particular, if they are able to support losses on a sustained basis without triggering liquidation, they may be included in Tier II capital.
BASEL Committee on Banking Supervision The Basel Committee is a committee of banking supervisors composed of members from each of the G10 countries. The Committee is a forum for discussion of solutions to specific supervisory problems. It coordinates the sharing of supervisory powers between national authorities vis-à-vis foreign banking institutions in order to ensure effective supervision of banking activities worldwide.
BASEL Capital Agreement The Basel Capital Accord is an agreement between representatives of countries in 1988 to create standardized risk-based capital requirements for banks across countries. The agreement was replaced by a new capital adequacy framework (BASEL II), published in June 2004. 

BASEL II is based on three mutually reinforcing pillars that allow banks and supervisors to properly assess the various risks that banks face. These three pillars are:

Risk-weighted asset The face value of the asset is multiplied by the risk weight assigned to the asset to arrive at the risk-weighted asset number. The risk weight for different assets is different, eg 0% on a government security and 20% on a AAA-rated foreign bank etc.
CRAR (Capital to Risk Weighted Assets Ratio) The ratio of capital to risk-weighted assets is obtained by dividing the bank’s capital by the aggregated risk-weighted assets for credit risk, market risk, and operational risk. The higher a bank’s CRAR, the better capitalized it is.
Credit risk The risk that a party to a contractual arrangement or transaction will not be able to meet its obligations or will fail to comply with its obligations. Credit risk can be associated with almost any financial transaction. BASEL-II provides two options for measuring the capital requirement for credit risk

1. standardized approach (SA) 

2. Internal Rating Based (IRB) Approach

Market risk Market risk is defined as the risk of loss arising from the movement of market prices or rates from the rates or prices established in the transaction or agreement. 

Two methodologies are available for estimating the capital requirement to cover market risks: 

1) Standardized Measurement Method: This method, currently implemented by the Reserve Bank, adopts a “building block” approach for interest rate and equity instruments that differentiates capital requirements for “specific risk” from those for “general market risk”. 

2) The Internal Models Approach (IMA): This method allows banks to use their own in-house method, which must meet the qualitative and quantitative criteria set by the BCBS and is subject to the express approval of the supervisory authority.

Operational risk The revised BASEL II framework offers the following three approaches for estimating operational risk capital requirements:

1) The Basic Indicator Approach (BIA): This approach sets the operational risk fee as a fixed percentage (“alpha factor”) of a single indicator that serves as a proxy for the bank’s risk exposure.

2) Standardized Approach (SA): This approach requires the institution to divide its operations into eight standard business lines and the capital requirement for each business line is calculated by multiplying the gross income of that business line by the coefficient (denoted beta) assigned to that business line.

3) Advanced Measurement Approach (AMA): Under this approach, the regulatory capital requirement will be equal to the level of risk generated by the bank’s internal operational risk measurement system. In India, banks have been advised to adopt BIA to estimate operational risk capital requirement, and 15% of the last three years average gross income is taken to calculate operational risk capital requirements.

Internal Capital Adequacy Assessment Process (ICAAP) In accordance with the BASEL II guidelines, banks are required to have an approved Internal Capital Adequacy Assessment Process (ICAAP) policy for assessing the ICAAP capital requirement at individual and consolidated levels. 
Supervisory Review Process (SRP) The supervisory control process presupposes the creation of appropriate risk management systems in banks and their control by the supervisory authority. 


Here is the GLOSSARY OF CENTRAL BANKING TERMS – PART 2  of this page.

And if you face any difficulty in understanding the above terms, then you can join the batch of expert team which is highly qualified to help you understand the meaning of these as well as other concepts of Central banking & Certified Associate of the Indian Institute of Bankers 2023 SYLLABUS & Study Material.

You can even find the application for CAIIB Exam 2023 preparation here:


Also Like:


Please enter your comment!
Please enter your name here

🤩 🥳 JAIIB NEW BATCH START 🥳 🤩spot_img
🤩 🥳 JAIIB CAIIB CLASSES 🥳 🤩spot_img



Continue to the category


JAIIB FREE NOTES OF PPB 2024 | BANKING OMBUDSMAN SCHEME In this article, we will discuss the Banking Ombudsman Scheme (which falls under the syllabus...


FREE BANK PROMOTION NOTES FOR 2024 | RISK MANAGEMENT So, the next session has already begun & there should not be anything that does not...


FREE RISK MANAGEMENT MOCK TEST 2024 | CAIIB 2024 This post contains IIBF CAIIB’s paper - Risk Management Mock Tests as per the CAIIB Syllabus...

JAIIB Principles and Practices of Banking Study Material Live Class Previous Year Questions Part 12

JAIIB PPB STUDY MATERIAL LIVE CLASS | PREVIOUS YEAR QUESTIONS PART 12   JAIIB exam is one of the premium flagship courses offered by IIBF twice...