A Summary and Explanation of the Computation of Risk Adjusted Capital Requirements Per the Basel II Accord

Treasury trade organizations report a sharp increase in demand of corporations wanting to manage their credit bank relationships. In doing so, these companies seek to understand the risk adjusted capital that credit banks must reserve against their fee based and credit based business, and the estimated return that the banks earn on this risk adjusted capital. Despite this increase in demand, less than 11% of corporations currently calculate these figures. The most cited reason by treasury and finance managers is a lack of understanding regarding the proper computation of risk adjusted capital. Calculation of a bank's required risk adjusted capital reserves is governed by Title 12 of the United States Code. Title 12 is a codified version of the Basel II Capital Accord, which is an international treaty governing the capital requirements of banks in the industrialized nations. With numerous facets and an exorbitant number of advisory opinions, these documents are difficult for non-banking corporations to decipher and utilize. Accordingly, this article summarizes the computation of a bank holding company's risk adjusted capital requirements per Title 12 and the Basel II Capital Accord so that non-banking corporations may use these figures in their bank relationship analyses. A brief example is then provided