tier-one capital requirement

[bestmarcus]

Dear David

i have failed in FRM 2008. Recently, i have saw a article in economist. i feel confused about ‘tier-one capital requirement’

http://www.economist.com/finance/displaystory.cfm?story_id=12294760

The average tier-one ratio, which measures capital based on the
riskiness of bank assets, stood at 8% in the first half of the year’in para 2.
i don't clear about the the change and the development of the
‘tier-one capital requirement’. Does the related tier one
ratio of banks equal to 8%? Why or why not?

i hope you can help me to understand the base concept about it
Best regards
Marcus

 

[David Harper CFA FRM]

Marcus,

I deeply apologize for not responding to this thread from January; I just lost in the mix until today when I took a closer look at the forum. Sorry...(and about your result, but i recall that you already mentioned that above...). I assume you figured this out. The regulatory capital ration (CAR or a.k.a., RAR) = 8% which can include Tier I, II and/or III capital where Tier I is the "highest buffer" being nearest to true equity. The Tier II + III cannot be greater than Tier I, so essentially the Tier I requirement is 50% of 8% = 4% (there are additional nuances; e.g., the 8% is currently scaled up; the Tier I is further subdivided...). So a bank could have entirely Tier I capital to meet th 8+%, or it could have 4% Tier I plus 4% Tier II + III to meet the 8%.

But i *assume* they mean that the Tier I, which must be at least 4%, runs at 8% (which is approximately the the total regulatory requirement) for this sample....Thanks, David