Questions about Capital Adequacy ratio

[cqbzxk]

Hi does anyone knows why should we set a ratio equal to 8%? in another word, why just like
Total capital>=Credit risk capital + Market risk capital + Operation Risk Capital, why should we times 12.5 on each part and finally time 8% again?

 

[ShaktiRathore]

Hi there ,
under Basel requirements the banks need to set minimum of 8% if their capital in reserve for facing losses. Its a regulation set up by the Basel committee and is not like setting up some benchmark based on some intense data analysis. Basel committee requires under its sets of regulations that banks should set aside some reserve (which s 8%) to cover up some unexpected future losses.Under Basel III the new requirements of buffers to maintain 2.5% of capital would raise the ratio of capital adequacy ratio from 8% to 10.5%. This is how the Basel committee foresee the minimum capital reserve to be minimum 8% this is how they see would be optimal to be the adequate capital adequacy ratio.

thanks