Offshore Bank Capital Requirements
11 February, 2015
Please note that this post is intended as a general discussion of offshore bank capital requirements, ratios and reserves. It far from a treatise on capital reserve requirements. I'm focused on basic offshore banking regulations in support of my article Offshore Banking License Jurisdictions.
Offshore bank capital requirements are the amount of capital and assets you must carry to support your balance sheet. Bank capital to assets is the ratio of bank capital and reserves to total assets. Capital and reserves include funds contributed by owners, retained earnings, general and special reserves, provisions, and valuation adjustments.
According to the World Bank, the average capital ratio for US banks is about 12%. Panama is running at about 10% and the UK at 5%. At times in our history, US had ratios as low as 5.5% in the 1940s.
An offshore bank's capital ratio is typically significantly higher. It is common to find a net capital ratio in Belize of 25%. For more information, see the central bank's report.
One could argue that a small offshore bank with high capital ratios is relatively more safe than it's large American cousin.
In practice, an offshore bank's capital ratios depends on ts investments, source of deposits, and the applicable weighted risk discount. That is to say, the central bank will discount the assets on your balance sheet based on their perceived risk, which increases the amount of capital you must carry.
You will find that these discounts are just as much about policy and politics as they are about protecting account holders. For example,
- You can accept unlimited amounts of gold with no capital reserves in certain countries. Do to higher than normal volatility in gold recently, some have moved to a 20% risk weighting.
- You can hold unlimited amounts of government instruments (from ANY country) with no capital reserve. A rule imposed by the IMF and world bank which I don't believe has made its way to the United States yet.
- Cash held at a correspondent requires a 20% reserve to account for counterparty risk. Cash held in your bank is zero.
The examples above are from my experience and may not match with published reports.
If you are to issue letters of credit, the ratio will depend on how they are secured. For example, one secured by cash at a counterparty would be 20%. One backed by government instruments would be zero. If the LC was not collateralized, the ratio would be negotiable from 20% to 100%.
From time to time, complex instruments are issued by a bank... such as a derivative or LC backed by a variety of collateral. Reserve ratios are negotiable and transactions approved on a case by case basis by the central bank. You can generally receive clearance in a few days.
For a real estate mortgage on a property the buyer will occupy, you must have 50% in reserve. The reserve for a rental or investment property iis 100%. Of course, everyone says they'll occupy the property at least part of the year.
Bluechip corporate bonds and stocks have reserves of 20% to 50%. These are negotiable.
Certain assets may be determined to have no value or be of high risk. An example would be a penny OTC stock. This requires a 100% reserve. If a client wishes to transact in these types of assets, you would usually move them off your books and into a brokerage.
For more specific examples, see the Eastern Caribbean Central Bank Regulations Schedule 11a.
I hope this post on offshore bank capital requirements has been helpful. For more information on forming a new bank, or acquiring an existing license, please call me at (619) 564-4062 or email Christian Reeves at email@example.com
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