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Thanks. We live and learn! John R.

From: John Hermann <hermann@picknowl.com.au>
Reply-To: socialcredit@elistas.com
To: socialcredit@elistas.com
Subject: [socialcredit] Capital adequacy (was: 10 can't pay 11 fallacy, again)
Date: Wed, 11 Jul 2007 00:15:10 +0930

Hi John,

By using the search facility in the web site of the Reserve Bank of New Zealand under the heading 'capital adequacy', one encounters the following page:
http://www.rbnz.govt.nz/search/index.asp?q=capital+adequacy&submit=Search According to article number 3, entitled Capital adequacy ratios for banks , we learn that the following conditions must be fulfilled as a requirement for the registration of banks in in New Zealand:

1. The ratio of tier 1 capital to risk weighted assets must be no smaller than 4%.
2. The ratio of total capital to risk weighted assets (capital adequacy ratio) must be no smaller than 8%.
3. Tier 2 capital must not exceed tier 1 capital.
4. Lower tier 2 capital must not exceed 50% of tier 1 capital.
5. Lower tier 2 capital must be amortized over the last five years of its life.

This conforms to an international standard known as the Basle 1 convention, which was promulgated in 1988 by the Bank for International Settlements. A complete explanation of what tier 1 and tier 2 capital are comprised of can be found in the above article. And for some reason the RBNZ article prefers to use the term 'credit exposures' rather than 'assets'.

The minimum capital adequacy ratio of 8% implies that the ratio of risk weighted assets RWA to total bank capital K (ie, the weighted financial assets which may be 'supported' by that capital) is 100 / 8 = 12.5. For loans to entities within New Zealand, and considering only on-balance sheet exposures, the risk weightings are:

1. Claims on banks (A1)                   20%
2. Claims on the public sector (A2)    20%
3. Residential mortgages (A3)           50%
4. All other credit (A4)                     100%

For off-balance sheet exposures the risk weightings are even more complicated. The ratio of total supported assets A to capital K is only equal to 12.5 in the special case where all loans fall into risk category 4. In general the ratio A/K will be somewhat greater than 12.5. For example if A1=X, A2=0, A3=3X and A4=3X (where X is some arbitrary quantity of money), then A/K = 18.6.

-- JH

At 10:43 AM 10/07/2007, John Rawson wrote:

Thanks. Anything as precise as "12.5" inferring a high degree of accuracy is unusual, to say the least. I certainly had never heard of it, and obviously our Royal Commission had not, but bnthen that is half a century dated now. Just what is it based on, and when was it propounded?    Regards.    John R.

Hi John,

The ratio that I mentioned has nothing to do with reserves as such or the reserve ratio. It is the capital adequacy ratio, and to my knowledge it applies all over the planet, even in countries like New Zealand which have a zero reserve requirement. Moreover reserves don't matter much these days, even in countries like the U.S. which retains a significant statutory reserve requirement (that's because banks can always borrow whatever excess reserves they require - from within the financial system - for their volume of lending). Each bank's lending is now primarily constrained by the magnitude of its regulatory capital in relation to its assets.

-- John Hermann

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