Chapter 3 · Part 3 — CCAR, CAR and Negative Capital
CCAR, CAR and Negative Capital
The two percentages everyone quotes, why the gap between them is the point, and what a negative capital ratio really means.
Yesterday you learned what is in the capital columns. Today you learn what NRB divides them by, why there are two ratios instead of one, and how to read the gap between them.
The two formulas
The KFI footnotes give them exactly:
┌──────────────────────────────────────────────────────────────┐ │ │ │ Core Capital │ │ CCAR = ──────────────────────────────────── × 100 │ │ Total Risk Weighted Exposures │ │ │ │ │ │ Total Capital Fund │ │ CAR = ──────────────────────────────────── × 100 │ │ Total Risk Weighted Exposures │ │ │ │ Same denominator. Different numerator. │ │ CAR is always ≥ CCAR, because Tier 2 ≥ 0. │ │ │ └──────────────────────────────────────────────────────────────┘
CCAR is Core Capital Adequacy Ratio — permanent capital against risk. CAR is Capital Adequacy Ratio — all eligible capital against the same risk.
Everything interesting is in the denominator.
Risk-weighted exposure — why not just use total assets?
Because not all assets are equally likely to lose you money. A loan to the Government of Nepal and an unsecured personal loan are both "assets", and treating them alike would be absurd.
So each exposure is multiplied by a weight before being added up:
RISK WEIGHTING — the idea [R]
(illustrative weights; the real ones are in the Framework)
Exposure Amount × Weight = Risk-weighted
───────────────────────────────────────────────────────────────
Cash in vault 100 0% 0
Claims on Govt of Nepal 100 0% 0
Claims on domestic banks 100 20% 20
Residential mortgage 100 60% 60
Corporate loan 100 100% 100
Unsecured personal loan 100 150% 150
───────────────────────────────────────────────────────────────
Total assets 600 330
= Total RWE
Two banks with identical Rs 600 of assets can have
completely different RWE — and therefore completely
different capital ratios on identical balance sheets.Plus, in the full framework, capital charges for operational risk and market risk are converted into equivalent risk-weighted amounts and added. That is why the denominator is called "Total Risk Weighted Exposures" and not "risk-weighted assets".
The consequence for an investor is important and under-appreciated:
The gap between CCAR and CAR
Since the denominator is shared, the difference between the two ratios is Tier 2 expressed as a percentage of RWE:
CAR − CCAR = Tier 2 ÷ RWE The gap IS the supplementary-capital contribution. A wide gap means the headline number leans on Tier 2.
Across the twenty commercial banks at Chaitra end 2082:
THE GAP, WIDEST TO NARROWEST (percentage points) NIC Asia CCAR 6.48 CAR 11.45 gap 4.97 ██████████ Nepal SBI CCAR 9.25 CAR 13.76 gap 4.51 █████████ Kumari Bank CCAR 9.12 CAR 12.82 gap 3.70 ███████ Prabhu Bank CCAR 8.57 CAR 12.25 gap 3.68 ███████ Himalayan Bank CCAR 7.70 CAR 11.26 gap 3.56 ███████ ... Agriculture Dev Bank CCAR 11.32 CAR 13.42 gap 2.10 ████ Prime Commercial CCAR 9.69 CAR 11.72 gap 2.03 ████ Standard Chartered CCAR 16.14 CAR 17.82 gap 1.68 ███ System CCAR 9.61 CAR 12.53 gap 2.92 ██████
Read NIC Asia and Standard Chartered together, because they make the point better than any explanation:
┌─────────────────────────────────────────────────────────────────────┐ │ NIC ASIA STANDARD CHARTERED │ │ │ │ CAR 11.45% 17.82% │ │ CCAR 6.48% 16.14% │ │ ─────── ─────── │ │ gap 4.97 pp 1.68 pp │ │ │ │ Both report a CAR above 11%. On the headline number they are │ │ in the same conversation. │ │ │ │ On CORE capital they are not remotely comparable: │ │ 16.14% is two and a half times 6.48%. │ │ │ │ SCB's cushion is almost entirely permanent equity. │ │ NIC Asia's is 43% borrowed, dated and repayable. │ └─────────────────────────────────────────────────────────────────────┘
Worked example — verifying the arithmetic yourself
The finance-company sheet prints Total RWE in rupees, so you can check NRB's own arithmetic. Do it once and the formula will never leave you.
ICFC FINANCE LIMITED — Chaitra end 2082 (Rs thousand) Given: Core capital 1,893,214 Total capital fund 3,030,223 Total RWE 20,828,377 CCAR = 1,893,214 ÷ 20,828,377 = 0.09090 = 9.09% Sheet prints 9.09% OK CAR = 3,030,223 ÷ 20,828,377 = 0.14549 = 14.55% Sheet prints 14.55% OK Tier 2 = 3,030,223 − 1,893,214 = 1,137,009 Tier 2 ÷ RWE = 1,137,009 ÷ 20,828,377 = 5.46 pp Check: CAR − CCAR = 14.55 − 9.09 = 5.46 pp OK
Every identity closes. Now the same arithmetic where the numerator is negative.
JANAKI FINANCE COMPANY LIMITED — Chaitra end 2082 (Rs thousand) Given: Paid-up capital 690,473 Core capital (300,192) ← negative Total capital fund (300,192) ← identical: no Tier 2 left Total RWE 4,461,841 Total deposit 2,490,510 Total loan 2,400,518 NPL 59.12% CCAR = −300,192 ÷ 4,461,841 = −6.73% CAR = −300,192 ÷ 4,461,841 = −6.73% Sheet prints both at −6.73% OK
What a negative capital ratio actually means
This is not a bad ratio. It is a different category of thing.
THE CAPITAL LINE
+16% +11% min [R] 0% −6.73%
│ │ │ │ │
────┼─────────────┼─────────────┼──────────┼────────────┼────►
│ │ │ │ │
strong adequate threshold NOTHING THE HOLE
LEFT EXTENDS PAST
THE OWNERS
Above zero: shareholders still have something to lose, and
they absorb the next loss.
At zero: shareholders have lost everything. Every further
rupee of loss lands on someone else.
Below zero: it already has. The institution's liabilities exceed
its assets on a regulatory basis. The money to close
that gap belongs to depositors and creditors.Janaki Finance holds Rs 2,490,510 thousand of deposits — roughly Rs 2.49 billion of other people's money — against negative regulatory capital. Pokhara Finance holds Rs 7,261,743 thousand with CCAR of −0.70%.
For an equity investor the conclusion is blunt and worth stating plainly:
This is not a prediction about any named institution, and it is not advice. It is what the arithmetic of a negative CCAR means.
The "Problematic" block
The finance-company release carries a second table below the main one, headed Problematic Finance Companies. Two institutions at Chaitra end 2082:
PROBLEMATIC FINANCE COMPANIES — Chaitra end 2082 (Rs thousand) ┌──────────────────────────┬───────────────┬──────────────────┐ │ │ Nepal Share │ Capital │ │ │ Markets & │ Merchant │ │ │ Finance │ Banking & │ │ │ │ Finance │ ├──────────────────────────┼───────────────┼──────────────────┤ │ Paid-up capital │ 233,332 │ 935,069 │ │ Core capital │ 349,187 │ 279,644 │ │ Total capital fund │ 349,239 │ 279,644 │ │ Total RWE │ 812,765 │ 403,791 │ │ CCAR │ 42.96 │ 69.25 │ │ CAR │ 42.97 │ 69.25 │ │ Total deposit │ 255,340 │ 27,190 │ │ Total loan │ 2,192,253 │ 663,530 │ │ Net liquidity │ 43.51% │ 604.89% │ │ NPL │ 98.48% │ 100.00% │ └──────────────────────────┴───────────────┴──────────────────┘
Look at this table and notice something genuinely counter-intuitive: the capital ratios are magnificent. 42.96% and 69.25% CCAR, against a system average around 10-11%. On the solvency columns alone these are the two best-capitalised institutions in Class "C" by a distance.
They are also the two NRB has designated as problematic, with 98.48% and 100.00% NPL.
The resolution of the paradox is in the denominator, and it is the most important single idea in this course:
WHY A DEAD INSTITUTION SHOWS A SPECTACULAR CAPITAL RATIO
Capital
CCAR = ───────────────────
RWE
When essentially the whole loan book is non-performing, the
institution has stopped lending. New exposures are not written.
Bad exposures get written down and may carry different weights.
RWE COLLAPSES.
Capital Merchant: loans 663,530 but RWE only 403,791
Nepal Share Mkts: loans 2,192,253 but RWE only 812,765
A small numerator over a collapsed denominator is a large
percentage. The ratio is arithmetically true and financially
meaningless.And Capital Merchant's 604.89% net liquidity is the same phenomenon from the other side: liquid assets are six times deposits, because deposits have almost entirely left (Rs 27 million remaining against Rs 935 million of paid-up capital), while the loans that remain are 100% non-performing and generate nothing.
The distribution across commercial banks
For context, here is where the twenty banks actually sit.
CCAR DISTRIBUTION — commercial banks, Chaitra end 2082
6% ├─ NIC Asia 6.48
│
7% ├─
│ Himalayan 7.70
8% ├─
│ Prabhu 8.57 Citizens 8.93
9% ├─
│ Kumari 9.12 RBB 9.21 SBI 9.25 Everest 9.58
│ Laxmi Sunrise 9.59 Nabil 9.69 Prime 9.69
│ NIMB 9.70 Global IME 9.71 NMB 9.76
10% ├───────────────────────── system 9.61 ─────────────
│ Sanima 10.03 Machhapuchhre 10.17
│ Nepal Bank 10.37 Siddhartha 10.66
11% ├
│ ADBL 11.32
12% ├
...
16% ├ Standard Chartered 16.14
Thirteen of twenty cluster between 8.5% and 10%. That tightness
is itself information: banks manage TO the requirement, not
comfortably above it. Capital is expensive, so they hold the
minimum plus a working margin and no more.The cluster tells you something about the sector's behaviour. It also tells you that a bank outside the cluster — in either direction — is doing something different, and is worth a question.
Formulas from today
CCAR = Core Capital ÷ Total Risk Weighted Exposures × 100
CAR = Total Capital Fund ÷ Total Risk Weighted Exposures × 100
CAR − CCAR = Tier 2 ÷ RWE (the supplementary contribution,
in percentage points)
RWE = Core Capital ÷ CCAR (recovering the denominator when
it is not printed)
Cross-check: Total Capital Fund ÷ RWE must equal the printed CARWhat you should be able to do now
- State both formulas and say why they share a denominator.
- Explain what risk weighting does and why two banks with identical assets can have different ratios.
- Compute the CCAR-to-CAR gap and say what it reveals about capital quality.
- Verify NRB's own arithmetic on the finance-company sheet, including the Tier 2 identity.
- Explain precisely what a negative CCAR means for depositors and for shareholders.
- Explain why the two "Problematic" companies show the highest capital ratios in their class, and why that is not good news.
Tomorrow: liquidity — the CD ratio everybody quotes, the two ratios almost nobody does, and why a solvent bank can still fail on a Sunday.
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