Capital adequacy equations

Capital adequacy equations

for securities firm:


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)

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