Capital adequacy equations
for securities firm:
and
for life insurance companies (NAIC recommendation):
Risk variables:
C0 Asset risk – affiliate
C1 Asset risk – investments
cs – common stock
o – other
C2 Insurance risk
C3 Interest rate, credit and market risk
a – credit
b – interest rate
c – market
C4 Business risk
a – business risk
b – administrative risk
However, if the ratio is less than:
] 2 (company action level): company must submit an RBC plan that indicates cause of reaching that capital level, problems with insurers business, and proposed corrective action, together with four-year financial projection.
1.5 (regulatory action level): plan (or revision of existing plan) as described in company action level, and regulator must review and issue “corrective order” specifying mandatory changes.
1 (authorized control level): either regulatory action level remedy (above), or, if considered to be in the best interest of policy holders, creditors, or public, place company under regulatory control for rehabilitation or liquidation
0.5 (mandated control level) regulator must place company under regulatory control for rehabilitation or liquidation
for commercial banks
(in addition to CET1/Total risk adjusted assets, Tier 1 equity/Total risk adjusted assets and (Total Tier1 + Tier 2 equity)/Total risk adjusted assets)
Tier 1 leverage ratio = Tier 1 capital/(Total assets + current exposure + implied exposure from derivatives)