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Capital adequacy

Capital adequacy

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the level of Capital to cover the lending, derivatives and other banking activities (and income generating assets) as defined by Capital Requirements Regulation (EU) No. 575/2013 reflecting Basel III rules on capital measurement and capital standards. Capital adequacy represents most important financial ratio in banking sector, that central regulators always watch very closely. It is due to the fact that it should address the financial health of the Bank as well as support of its shareholders through providing fresh money, if needed.

The aim of European regulators was to set certain minimum ratio of Capital that all EU-based banks and financial institutions would have to comply with in order to manage financial stability. This is a consequence of previous financial crisis (2008) when capital buffer of the Banks appeared not to be sufficient to withstand the turmoil on markets world-wide and local Governments had to bail-out many banks that were lateron identified as systemic-important so that their failure could have negative impact on EU economy as such. Among others, such label received banks like Societe Generale, Erste Bank, ING Group, Deutsche Bank and others. Latest target under Basel III is that all supervisied financial institutions would reach 10,5% of total Capital Adequacy starting from 2019. In other words if the Bank has total risk weighted assets of €10bn it should keep total capital of at least €1,5bn (incl. subordinated capital and other Add-on items).

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