Formation of the capital of commercial banks

Over the past years, the banking system of Uzbekistan has consistently developed from specialized state institutions to independent commercial entities - credit institutions. In a relatively short historical period, a lot of difficult tasks of the strategic and tactical level have been solved. Professional unions and associations of bankers have been formed to exchange experience, discuss pressing problems, and develop a unified position on issues of professional activity. At the same time, always, in the process of interaction between Uzbek and foreign banks, banks of developed countries have been a benchmark in providing quality services, reaching customers and promoting a banking product on the market. Many Uzbek banks, processing the already accumulated experience of their foreign colleagues, taking into account the specifics, strive to improve the quality of the banking product, its attractiveness for the client, taking into account regional characteristics. This exchange is mutually beneficial.

Bankers are already aware that the existing standards for calculating capital will be replaced by a new set of standards known as the Basel Accord (or Basel 2/3). At the same time, the largest banks will begin to apply this agreement at an earlier date.

Despite the differences in the processes and timing of implementation of the principles of the Basel Agreement between countries and individual banks, the size of the banks' overall credit risk in dealing with clients will remain unchanged. The changes are likely to affect the types of risks that individ- ual banks accept or reject based on their own assessment of capital adequacy and risk level. This situation creates a number of serious threats and potential opportunities.

The reports assessing the impact of Basel III standards on the banking sector and economic growth note that since banks need to maintain profitability in the face of pressure on stable portions of capital (equity and retained earnings, which are most often used to strengthen the quality of basic capital and fixed capital), they will raise interest rates on loans, which will lead to a decrease in the availability of credit resources, a decline in lending activity and lending volumes and, as a result, to a slowdown in economic growth.

The equity capital of commercial banks is one of the types of banking resources that is subject to careful regulation by both the Central Bank and commercial banks. The bank's equity capital is an integral part of its financial resources, which forms the financial basis for the bank's development [1].

For effective management of equity capital and to use it as the most important regulator of the bank's activities, it is necessary to adequately assess its actual availability. The bank's equity capital forms the basis of the commercial bank's activities. It is formed at the time of the bank's creation and initially consists of the amounts received from the founders as their contribution to the authorized capital of the bank, which can be made both directly, if the bank is created in the form of a limited liability company, and through the purchase of shares, if the bank was created in form of a joint stock company.

Equity capital also includes all savings received by the bank in the course of its activities, which were not distributed among the shareholders (participants) of the bank in the form of dividends or spent for other purposes. Equity capital represents the sum of money that will be distributed among the shareholders (participants) of the bank in the event of its closure.

Own funds (capital) perform a number of important functions in ensuring the management and life of a commercial bank. The protective function is manifested in the fact that capital serves as a kind of buffer absorbing damage from current losses until the management of the bank resolves emerging problems, ensuring the continuation of the bank's activities regardless of the presence of losses. Due to the presence of its own capital, a commercial bank can conduct risky operations. Losses arising from these operations are covered by its own capital, without affecting the attracted funds of depositors. At the same time, the possibility of losing equity capital stimulates shareholders to ensure that the bank is managed reliably and reasonably. In the event of bankruptcy, the bank's equity capital becomes a source of compensation to creditors and depositors.

Fulfilling a regulatory function, capital acts as a regulator of the bank's activities, through which state bodies set him standards of economic behavior that warn him against excessive risks. According to the current legislation, the economic standards established by the Central Bank and regulating the activities of commercial banks are mainly based on the size of the bank's own funds. The size of the banks' own funds determines the scale of its activities. The possibilities of commercial banks to expand active operations are determined by the size of their own capital actually available.

It should be noted that not all countries began to implement the Basel III capital adequacy requirements since 2013, and at the initial stage of the implementation of these requirements, national prudential norms in terms of banking capital regulation differed across countries (table 1).

Table 1. International practice of regulating bank capital adequacy before the implementation of the Basel III agreement [2]

Since 2013, Australia, Hong Kong, India, Canada, China, Mexico, Saudi Arabia, Singapore, Thailand, Switzerland, South Africa, and Japan have begun to implement Basel III capital requirements in the national banking system. Along with Russia, the EU countries, the USA and some others have introduced Basel III capital adequacy requirements since 2014. It can be noted that in a number of countries (USA, Switzerland, Great Britain, China) the requirements for bank capital are set stricter than those defined in the Basel III agreement. As a result, for example. In the United States, according to a number of American experts, for many medium and small banks, the implementation of Basel III has become a rather heavy burden, causes an additional burden on the capital of such banks and a decrease in their profitability. It is noted that when developing the Basel III agreement, it was supposed to extend its requirements only to the largest banks in order to increase their financial stability and the stability of national banking systems. In practice, after the implementation of anti-crisis measures in the United States, the consolidation of American transnational banks continues, and the problem of their financial stability remains unresolved in full [3].

The sources of the bank's capital formation are the bank's authorized capital, the bank's reserve fund, special funds and retained earnings. The following factors can be identified that affect the size of equity:

• 1)    the level of the minimum requirements of the CBU for the capital of a commercial bank;

• 2)    the specifics of the clientele. With a significant number of small depositors, less own funds will be required than with large depositors;

• 3)    the nature of active operations. The presence of a significant volume of risky transactions requires a relatively large amount of equity capital.

Table 2. Information on the capital of banks of the Republic of Uzbekistan (trillion soums) [4]

The assets of the banking system of the Republic of Uzbekistan in 2019 amount to 272.7 trillion soums, which is 372.6% more compared to 2015, and have an upward trend. In the structure of assets, we see that the share of risky assets, in turn, of loans is high, meanwhile, the increase in assets was also influenced by the rapid growth of bank capital. The amount of problem loans also has an upward trend, but has grown less than the amount of loans issued.

In the course of our study, we identified ways to increase bank capital by identifying existing problems by banks in the process of their capitalization, as well as solving them at a possible level. In our opinion, they consist of the following:

• -    it should be aimed at a sharp reduction in the share of reserves for probable losses in the capital structure of commercial banks of the republic for recorded assets, which are an unstable element, and an increase in the amount of net or retained earnings, which is a relatively stable element of capital, in the amount of reduced funds;

• -    the share of net profit in the structure of bank capital should be increased. In our opinion, for this it is necessary to develop an annual financial policy of the bank and must be approved by the supervisory board of the bank;

• -    it is necessary to constantly increase the share of retained earnings in the structure of bank capital. Because retained earnings, together with the authorized capital of the bank, is the most stable part of the capital. They will become the basis for the development of banking. Moreover, as we know, if the requirements of Basel III are met, retained earnings and authorized capital are considered the basis for increasing the bank capital adequacy.

Full implementation of the aforementioned arguments and opinions in banking activities will increase the efficiency of banking activities, have a positive effect on the processes of their capitalization, and serve as an economic basis for their stable activities.