Circular 88 to Commercial Banks and Savings and Housing Banks: Capital Adequacy

Issued under article 43 of the decree of November 14, 1980, the circular sets two capital standards that every bank must meet at all times: a maximum multiple of 20 between assets and regulatory capital, and a minimum ratio of 12% between regulatory capital and risk-weighted balance-sheet and off-balance-sheet assets. Regulatory capital is the sum of Tier 1 (core) and Tier 2 (supplementary) capital, with Tier 2 limited to 50% of Tier 1 and goodwill deducted. Assets are weighted at five rates (0%, 20%, 50%, 75% and 100%), and off-balance-sheet items are converted to credit equivalents.

Banks had to comply by March 31, 1999, with transitional standards of 25:1 and 8% at that date, 22:1 and 10% at September 30, 2000 and 20:1 and 12% at September 30, 2001. Breaching a standard brings a penalty of 1/10 of 1% of the capital needed to restore the ratio, with a 90-day period to correct the ratio, and the circular lists the quarterly reporting annexes.