Core Banking

By:Rohit Singh Verma

BANKING AND IT’S HISTORY The name bank derives from the Italian word banco

which means "desk/bench“ The word traces its origins back to the Ancient Roman

Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived.

The Lombard Jews in Italy had benches in the marketplace, here they exchanged money and bills. When a banker failed, his bench was broken by the people and he was called bankrupt.

French word “Banque” which also means a Bench which resulted in word BANK.

Definition of BANK

A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses.

A bank is an institution that accepts various types of deposits and then advances money in form of loans to people requiring it.

According to the banking Companies Act, 1949- Banking means the accepting , for the purpose of lending or investment, of deposits of money from public repayable on demand or otherwise, and withdrawable by cheque, draft, pay order or otherwise.

FUNCTIONS OF BANK

Lending and borrowing of money. Issue of banknotes (promissory notes issued by a

banker and payable to bearer on demand) Currency exchange Portfolio management Safekeeping of documents and other items in safe

deposit boxes Distribution or brokerage Issuing bank drafts and bank cheques. Processing of payments by way of

telegraphic transfer, EFTPOS, internet banking or other means

TYPES OF BANKING

Investment Banking Retail Banking Business Banking or Commercial

Banking Private Banking Islamic Banking

Investment Banking

An investment banking is a financial institution that raises capital, trades securities and manages corporate mergers and acquisitions.

Another term for investment banking is corporate finance.

Unlike commercial banks and retail banks, investment banks do not take deposits.

ACTIVITIES OF INVESTMENT BANKERS

Underwriting (Public offering of securities)

Trading of Securities

Mergers and Acquisitions

Money Management: (Investment banking firms have created

subsidiaries that manage funds for either individual investors or institutional investors such as pension funds.)

List of Investment banks

Bank of America (Bank of America Merrill Lynch) Barclays (Barclays Capital) BNP Paribas (BNP Paribas CIB) Citigroup (Citi Institutional Clients Group) Credit Suisse Deutsche Bank Goldman Sachs JPMorgan Chase (J.P. Morgan Investment Bank) Morgan Stanley Nomura Holdings Inc UBS (UBS Investment Bank) RBS (RBS Global Banking and Markets) Wells Fargo Securities

Retail Banking

Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks.

Retail Banking Services

Savings and Transactional accounts ( Current Account),

Mortgages,  Personal loans,  Debit cards,  Credit cards, Telephone banking Mobile banking Electronic funds transfer

Private Banking

Private banking is a term for banking, investment and other financial services provided by banks to private individuals investing sizeable assets. The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers.

Historically private banking has been viewed as very exclusive, only catering for high net worth individuals with liquidity over $2 million.

An institution's private banking division will provide various services such as wealth management, savings, inheritance and tax planning for their clients.

Private Banking

For private banking services clients pay either based on the number of transactions, the annual portfolio performance or a "flat-fee", usually calculated as a yearly percentage of the total investment amount.

The word "private" also alludes to bank secrecy and minimizing taxes through careful allocation of assets or by hiding assets from the taxing authorities. Swiss and certain offshore banks have been criticized for such cooperation with individuals practicing tax evasion.

Private bank rankings

Rank in 2010 Company Rank in 2009

1 JPMorgan 3

2. Goldman Sachs 2

3. UBS 1

4. Credit Suisse 6

5. HSBC 4

6. Citigroup 5

7. Pictet 8

8= Deutsche Bank 7

8= Rothschild 11

10. BNP Paribas 10

Islamic Banking

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for loans of money (Riba i.e. surplus )for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles. While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community

Types of Bank in India

Types of Bank

Central Bank (RBI)

Commercial Banks

1.Public Sector 2.Private Sector

3.Foreign Banks

Development Banks

Co-operative

Banks

1.Primary credit societies 2.Central Co-op Banks 3.State Co-op Banks

Specialized Banks

EXIM Bank, SIDBI,

NABARD

Central Bank

A bank which is entrusted with the functions of guiding and regulating the banking system of a country.

The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the banker’s bank.

The Central Bank maintains record of Government revenue and expenditure under various heads.

It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans.

In addition, foreign exchange rates are also determined by the central bank.

Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods.

Commercial bank 

A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking.

It is a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits.

Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individual.

Commercial bank 

After the implementation of the Glass-Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S. law, some use the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict separation of investment and commercial banking never applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct to consumers. Many banks offer both commercial and retail banking services.

Types of Commercial banks:Commercial banks are of three types i.e., Public sector banks, Private sector banks and Foreign

banks.

(i) Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Baroda and Dena Bank, etc.

Types of Commercial banks:(ii) Private Sectors Banks: In case of private sector banks majority of

share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd. Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, Axis, ICICI, HDFC, Yes Bank etc.

(iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlay’s Bank, RBS etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

Development banks

Business often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization.

Such financial assistance is provided by Development Banks. They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public.

Industrial Finance Corporation of India (IFCI), IDBI (Industrial Development Bank of India ) and State Financial Corporations (SFCs) are examples of development banks in India.

Co-operative Banks

People who come together to jointly serve their common interest often form a co-operative society under the Co-operative Societies Act.

When a co-operative society engages itself in banking business it is called a Co-operative Bank.

The society has to obtain a license from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of the State.

As regards banking business, the society must follow the guidelines set and issued by the Reserve Bank of India.

Types of Co-operative Banks Primary Credit Societies: These are formed at the village or

town level with borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds.

Central Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks.

State Co-operative Banks: These are the apex (highest level) co-operative banks in all the states of the country. They mobilise funds and help in its proper channelisation among various sectors. The money reaches the individual borrowers from the state co-operative banks through the central co-operative banks and the primary credit societies.

Specialized Banks

Export Import Bank of India (EXIM Bank):

If you want to set up a business for exporting

products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you the required support and assistance.

The bank grants loans to exporters and importers and also provides information about the international market.

It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc.

Specialized Banks

Small Industries Development Bank of India (SIDBI):

If you want to establish a small-scale business unit or industry, loan on easy terms can be available through SIDBI.

It also finances modernisation of small-scale industrial units, use of new technology and market activities.

The aim and focus of SIDBI is to promote, finance and develop small-scale industries.

Specialized Banks

National Bank for Agricultural and Rural Development (NABARD):

It is a central or apex institution for financing

agricultural and rural sectors. If a person is engaged in agriculture or other

activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks.

It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries,cottage and village industries handicrafts and allied economic activities in rural areas.

Bank Channels and services Banks offer many different channels to access their banking

and other services:

ATM is a machine that dispenses cash and sometimes takes deposits without the need for a human bank teller. Some ATMs provide additional services.

A branch is a retail location Call center Mail: most banks accept check deposits via mail and use mail to

communicate to their customers, e.g. by sending out statements Mobile banking is a method of using one's mobile phone to conduct

banking transactions Online banking is a term used for performing transactions, payments

etc. over the Internet Relationship Managers, mostly for private banking or business

banking, often visiting customers at their homes or businesses Telephone banking is a service which allows its customers to perform

transactions over the telephone without speaking to a human

Bank Business Model

A bank can generate revenue in a variety of different ways:

Interest, Transaction fees, Financial advice. The main method is via charging interest on

the capital it lends out to customers. Banks make money from card products

through interest payments and fees charged to consumers and transaction fees to companies that accept the cards. 

Risks of Bank

Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Some of the main risks faced by banks include:

Credit risk: risk of loss arising from a borrower who does not make payments as promised.

Liquidity risk: risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).

Market risk: risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors.

Operational risk: risk arising from execution of a company's business functions.

The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted

(risk-weighted asset).

Credit Risk

Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk.

Investor losses include lost principal and interest, decreased cash flow, and increased collection costs, which arise in a number of circumstances:

1. A consumer does not make a payment due on a mortgage loan, credit card or other loan.

2. A business does not pay an employee's earned wages when due.

Banking Regulation

Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines.

The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most common objectives are:

Prudential—to reduce the level of risk bank creditors are exposed to (i.e. to protect depositors)

Systemic risk reduction—to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures

Avoid misuse of banks—to reduce the risk of banks being used for criminal purposes, e.g. laundering the proceeds of crime.

To protect banking confidentiality.

General principles of bank regulation

Minimum requirements (The most important minimum requirement in banking regulation is maintaining minimum capital ratios).

Supervisory review (Banks are required to be issued with a bank license by the regulator in order to carry on business as a bank, and the regulator supervises licensed banks for compliance with the requirements and responds to breaches of the requirements through obtaining undertakings, giving directions, imposing penalties or revoking the bank's license.)

Market discipline (The regulator requires banks to publicly disclose financial and other information, and depositors and other creditors are able to use this information to assess the level of risk and to make investment decisions. As a result of this, the bank is subject to market discipline and the regulator can also use market pricing information as an indicator of the bank's financial health.)

Instruments and requirements of bank regulation.

Capital requirement (The capital requirement sets a framework on how banks must handle their capital in relation to their assets. Internationally, the Bank for International Settlements' Basel Committee on Banking Supervision influences each country's capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accords. The latest capital adequacy framework is commonly known as Basel II.)

Reserve requirement.

Corporate governance.

Financial reporting and disclosure requirements

Credit rating requirement

Large exposures restrictions

BASEL Accord

The Basel Accords refer to the banking supervision Accords (recommendations on banking laws and regulations) -- Basel I and Basel II issued and Basel III under development -- by the Basel Committee on Banking Supervision (BCBS). They are called the Basel Accords as the BCBS maintains its secretariat at the Bank of International Settlements in Basel, Switzerland and the committee normally meets there.

The Basel Committee is named after the city of Basel, Switzerland

BASEL I

Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimal capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992. Basel I is now widely viewed as outmoded.

Basel I, that is, the 1988 Basel Accord, primarily focused on credit risk.

Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero, ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Banks with international presence are required to hold capital equal to 8 % of the risk-weighted assets. However, large banks like JPMorgan Chase found Basel I's 8% requirement to be unreasonable, and implemented credit default swaps so that in reality they would have to hold capital equivalent to only 1.6% of assets.

BASEL II

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.

 The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face.

Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse.

BASEL II …

Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices.

“The greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.”

Objective of BASEL II

The final version aims at:Ensuring that capital allocation is

more risk sensitive;Separating operational

risk from credit risk, and quantifying both;

Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

Basel II "three pillars" concept

The first pillar:

The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this stage.

The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach".

For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or TSA, and the internal measurement approach (an advanced form of which is the advanced measurement approach or AMA).

For market risk the preferred approach is VaR (value at risk).

Basel II: Second Pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system.

BASEL II: The third pillar

This pillar aims to promote greater stability in the financial system

Market discipline supplements regulation as sharing of information facilitates assessment of the bank by others including investors, analysts, customers, other banks and rating agencies. It leads to good corporate governance. The aim of pillar 3 is to allow market discipline to operate by requiring lenders to publicly provide details of their risk management activities, risk rating processes and risk distributions. It sets out the public disclosures that banks must make that lend greater insight into the adequacy of their capitalisation. when marketplace participants have a sufficient understanding of a bank’s activities and the controls it has in place to manage its exposures, they are better able to distinguish between banking organisations so that they can reward those that manage their risks prudently and penalise those that do not.

BASEL Dictionary

BCBS: The Basel Committee on Banking Supervision is an institution created by the central bank Governors of the Group of Ten nations. It was created in 1974 and meets regularly four times a year.

Bank of International Settlements: The Bank for International Settlements (BIS) is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government. The BIS carries out its work through subcommittees, the secretariats it hosts, and through its annual General Meeting of all members. It also provides banking services, but only to central banks, or to international organizations like itself. Based in Basel, Switzerland, the BIS was established by the Hague agreements of 1930.

Regulatory arbitrage: A practice whereby firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulation

Banking in India

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct.

The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal.

This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras. Three of which were established under charters from the British East India Company

 The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. The Imperial Bank of India (IBI) was the oldest and the largest commercial bank of the Indian subcontinent, and was subsequently transformed into State Bank of India in 1955

Banking in India…Post Independence.

The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI).

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India.“

The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

Banking in India: Liberalisation

In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank.

This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

Important Banking Terms

SLR CRR Repo Rate Reverse Repo Rate Bank Secrecy Secured Loan Unsecured Loan Solvency and Insolvency  Solvency II

SLR- Statutory Liquidity Ratio

Statutory Liquidity Ratio is the amount of liquid assets, such as cash, precious metals or other short-term securities, that a financial institution must maintain in its reserves. The statutory liquidity ratio is a term most commonly used in India.

The objectives of SLR are: To restrict the expansion of bank credit and To ensure solvency of banks.

The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively.

SLR restricts the bank’s leverage in pumping more money into the economy.

SLR Rate = Total Demand/Time Liabilities x 100%

Currently, in India, banks have to maintain a SLR of 25% which means that 25% of the value of demand and time liabilities has to be invested in approved securities

CRR- Cash Reserve Ratio

CRR is the amount of funds that the banks have to keep with RBI. It is calculated on the total deposits that the bank has as on the date. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.

Higher the CRR, the lower the money available for lending, resulting into reduction in credit expansion by controlling the money that goes out of loans

Present CRR = 5.25 %.

Repo Rate

Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

Current Repo Rate is 5%.

Reverse Repo Rate

Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. 

Current Reverse Repo Rate is 3.5%.

Liquidity vs. Inflation trade-off  Liquidity InflationPolicy Rate hike (Repo and Reverse Repo)

Drains liquidity

further as rates go up

Helps manage demand side

inflation

Lower CRR Helps ease liquidity

Not much impact on inflation right away. But lower

CRR goes against the stance to

lower inflation. More liquidity and

money supply means more inflationary pressures

Lower SLR Eases liquidity

But with banks having more

money it could lead to higher

credit and inflation

Bank Secrecy

Bank secrecy (or bank privacy) is a legal principle in some jurisdictions under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply (for example, a criminal complaint has been filed). In some cases, additional privacy is provided to beneficial owners through the use of numbered bank accounts or otherwise. Bank secrecy is prevalent in certain countries, such as Switzerland, Singapore, Lebanon and Luxembourg, as well as offshore banks and other tax havens under voluntary or statutory privacy provisions.

Secured Loan

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower.

Unsecured Loan

In finance, unsecured debt refers to any type of debt or general obligation that is not collateralised by a lien on specific assets of the borrower in the case of a bankruptcyor liquidation.

Also called signature loans or personal loans. These loans are often used by borrowers for small purchases such as computers, home improvements, vacations or unexpected expenses.

An unsecured loan means the lender relies on your promise to pay it back. They're taking a bigger risk than with a secured loan, so interest rates for unsecured loans tend to be higher. You normally have set payments over an agreed period and penalties may apply if you want to repay the loan early. Unsecured loans are often more expensive and less flexible than secured loans, but suitable if you want a short-term loan (one to five years).

Credit Cards.

Solvency and Insolvency

Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth.

Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.

Solvency II

Solvency II is the updated set of regulatory requirements for insurance firms that operate in the European Union. It is scheduled to come into effect on 1 January 2013.

Solvency II will be based on economic principles for the measurement of assets and liabilities. It will also be a risk-based system as risk will be measured on consistent principles and capital requirements will depend directly on this. While the Solvency I Directive was aimed at revising and updating the current EU Solvency regime, Solvency II has a much wider scope.

A solvency capital requirement may have the following purposes:1. To reduce the risk that an insurer would be unable to meet claims;2. To reduce the losses suffered by policyholders in the event that a

firm is unable to meet all claims fully;3. To provide early warning to supervisors so that they can intervene

promptly if capital falls below the required level; and4. To promote confidence in the financial stability of the insurance

sector

Solvency II

Often called "Basel for insurers," Solvency II is somewhat similar to the banking regulations of Basel II. For example, the proposed Solvency II framework has three main areas (pillars):

Pillar 1 consists of the quantitative requirements (for example, the amount of capital an insurer should hold).

Pillar 2 sets out requirements for the governance and risk management of insurers, as well as for the effective supervision of insurers.

Pillar 3 focuses on disclosure and transparency requirements.

The pillar 1 framework set out qualitative and quantitative requirements for calculation of technical provisions and Solvency Capital Requirement(SCR) using either a standard formula given by the regulators or an internal model developed by the (re)insurance company. Technical provisions represent the current amount an (re)insurance company would have to pay for an immediate transfer of its obligations to a third party. The SCR is the capital required to ensure that the (re)insurance company will be able to meet its obligations over the next 12 months with a probability of at least 99.5%. In addition to the SCR capital a Minimum Capital Requirement (MCR) must be calculated which represents the minimum level of capital the breach of which results in supervisory action.

Explanations

Capital Surplus is a term used by economists to denote capital inflows in excess of capital outflows on a country's balance of payments.

Banknote: A banknote (often known as a bill, paper money or simply a note) is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender.

Wealth Management: Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services. High Net Worth Individuals (HNWIs), small business owners and families who desire the assistance of a credentialed financial advisory specialist call upon wealth managers to coordinate retail banking, estate planning, legal resources, tax professionals and investment management. Wealth managers can be an independent CERTIFIED FINANCIAL PLANNER.

Telegraphic Transfer or Telex Transfer , often abbreviated to TT, is an electronic means of transferring funds overseas. A transfer charge is collected while sending money. A banking term commonly called "T/T," meaning a cable message from one bank to another in order to effect the transfer of money. It is most often used in UK Banking to refer to a CHAPS transfer; that is a payment made via the Clearing House Automated Payments System.

' Rupee ' comes from the Sanskrit word ' Rupa ' which means ' Beauty '

Explanations…

EFTPOS: Electronic Funds Transfer at Point of Sale is the general term used for debit card based systems used for processing transactions through terminals at points of sale

Underwriting: Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage, or credit). The name derives from the Lloyd's of London insurance market. Financial bankers, who would accept some of the risk on a given venture (historically a sea voyage with associated risks of shipwreck) in exchange for a premium, would literally write their names under the risk information that was written on a Lloyd's slip created for this purpose.

Securities: A security is a fungible, negotiable instrument representing financial value.

Securities are broadly categorized into debt securities (such as banknotes, bonds and debentures) and equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps. 

Risk-weighted asset is a bank's assets weighted according to credit risk.

Credit Default Swaps: A credit default swap (CDS) is a swap contract and agreement in which the protection buyer of the CDS makes a series of payments (often referred to as the CDS "fee" or "spread") to the protection seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) experiences a credit event.

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