Learning Objectives:

  • Understand the purpose of bank capital.

  • Apply the Basel capital framework.

  • Explain capital management and ICAAP.

7.1 The Purpose of Bank Capital

Bank capital serves as a buffer to absorb losses and protect depositors. The Bocconi University course covers “bank balance sheets, bank performance, and bank evaluation” as a core topic . Capital adequacy ensures that the bank can withstand unexpected losses and maintain solvency.

7.2 The Basel Capital Framework

The Basel Accords provide the global standard for capital adequacy. The BTRM programme covers “Basel capital adequacy rules” and “capital management” as core topics . The University of Nottingham module includes “the role of capital in risk management in a financial institution” . Key components include:

  • Tier 1 Capital: Core capital (equity and disclosed reserves).

  • Tier 2 Capital: Supplementary capital (subordinated debt, loan-loss reserves).

  • Risk-Weighted Assets (RWA): Assets adjusted for risk.

  • Capital Ratios: CET1 ratio, Tier 1 ratio, Total Capital ratio.

7.3 ICAAP and Capital Planning

The Internal Capital Adequacy Assessment Process (ICAAP) is the bank’s own assessment of its capital needs . The BTRM programme covers “ICAAP principles” as a core topic . Key elements include:

  • Risk Identification: Identifying all material risks.

  • Capital Projection: Forecasting capital needs under various scenarios.

  • Stress Testing: Assessing capital adequacy under stress.

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