Capital Requirements and Capital Buffer Banks’ Capital and Portfolio Risk Behavior in Pakistan

Abstract :

Basel Capital Accords have been the focus of international banking regulations. The crucial role of banks in maintaining the growth of the economy and their feasible contributions when it comes to economic failures, leads the Basel Committee on Banking Supervision (BCBS) to sufficiently concentrate on regulations of the banking sector. On international levels, banks were becoming more and more active for a competition with contemporary banks of other jurisdictions. Therefore, the regulators attempt to provide similar advantages and opportunities to all banks by harmonizing Basel Minimum Capital Requirements. After the Basel I and II, the Basel III mainly focused on quality as well as quantity in capital of banks, under Basel III banks have to retain ratio of minimum total capital to risk-weighted assets as well as the bank will hold excess capital, capital above the minimum requirement, as conservation buffer and banks have to administer counter-cyclical buffer. Conservation buffer in capitals is well-maintained to ensure safe and sufficient levels, banks prevent to absorb losses in assets, especially in times of financial stress leading to economic crisis and the counter-cyclical buffer ensures that banks have sufficient capitals during growth of excess credit, which occurs generally when there is low level of perceived risk in assets.