The paper presents the key changes to capital adequacy provisions which were introduced by the sixth amendment to the German banking law. The changes are designed to bring local regulations and supervision practices in line with international standards, in particular the Basle Committee recommendations.

The amendment modifies the concept of capital, introducing new capital categories which can be applied to supplementary or third-tier capital. Credit risk is now to be cushioned with core or supplementary capital only, while market risk can also by covered by third-tier capital. Both the assets and off-balance items of a bank should be divided into a banking book and a trading book, according to the purpose of the original transaction as specified by the relevant book entry. In terms of risk, banking operations have been classified in a new way which accounts for both credit and market risk (currency position, commodity contract position, trading book and option risks). The banking book is exposed to credit risk, while trading book is subject to market risk (credit risk of a trading book is treated as part of its market risk). Exposure to the respective types of risk is calculated with formulae specific to the capital category. A supervising body may permit a bank to apply its own risk evaluation methods, as long as they comply with certain formal and conceptual requirements.

In the light of the new supervising principles, a bank´s safety is guaranteed when two capital adequacy requirements are met. Firstly, core and supplementary capital should constitute, at the end of each banking day, a minimum of 8% of the banking book, 4% of which should be covered by core capital (to offset the credit risk of the banking book). Secondly, the sum of credit equivalent amounts for market risk items should not exceed, at the close of each banking day, the differential of capital (core and supplementary) and 8% value of the banking book - increased by third-category capital (market-risk coverage). Both prudential provisions are reflected in the capital adequacy ratio.