June 2007 Capital Adequacy Extension © Copyright 2007, CCRO. All rights reserved. Page 22 of 92 As is evident from Figure 2.1, debt and debt-like instruments reduce the equity of a company. All forms of debt should be accounted for in this component. Debt should reflect the dollar value of the claims on a company that third parties hold as a result of financing or commercial contracts. This includes both on- and off-balance sheet debt. On-balance sheet debt includes debt obligations such as commercial paper, first mortgage bonds, capitalized leases, and deferred taxes. Examples of off-balance sheet debt are operating leases, guarantees, and unfunded pension obligations. Figure 3.3 illustrates the tree of components of total liabilities typically included in an analysis. Figure 3.3 Total Liabilities 3.2. The Risk Capital Requirement After establishing equity as the difference between total assets and total liabilities, the next steps include determining the risk capital required to withstand potential adverse events in the areas of Market, Credit, and Operative risk. Concerning the Business Risk category, as will be explained in Chapter 7, the risks that fall within this category ST Risk Management Liabilities Accrued Expenses Margins Accounts Payable Non-interest bearing credit liabilities Commercial Paper First Mortgage Bonds Capitalized Leases Deferred Taxes Operating Leases Guarantees Unfunded Pension Obligations Off Balance Sheet Obligations Long Term Debt and Liabilities Total Liabilities Short Term Liabilities LT Risk Management Liabilities