Objective-: Basel Is A City in Switzerland
Objective-: Basel Is A City in Switzerland
Objective-: Basel Is A City in Switzerland
money in the public sector banks….. To understand why??? We have to first
understand that what BASEL ACCORD or BASEL NORMS is all about.
OBJECTIVE-
The set of agreement by the BCBS(BASEL COMMITTEE ON BANKING
SUPERVISION), which mainly focuses on risks to banks and the financial system
are called Basel accord. The purpose of the accord is to ensure that financial
institutions have enough capital on account to meet obligations and absorb
unexpected losses. India has accepted Basel accords for the banking system.
Up till now BASEL ACCORD has given us three BASEL NORMS which are
BASEL 1,2 and 3 but before coming to that we have to understand following
terms-
CAR/CRAR- Capital Adequacy Ratio/ Capital to Risk Weighted Asset
Ratio
BASEL-1
In 1988,The Basel Committee on Banking Supervision (BCBS) introduced capital
measurement system called Basel capital accord,also called as Basel 1. . It focused
almost entirely on credit risk, It defined capital and structure of risk weights for
banks.
The minimum capital requirement was fixed at 8% of risk weighted assets (RWA).
India adopted Basel 1 guidelines in 1999.
BASEL-2
In 2004, Basel II guidelines were published by BCBS, which were
considered to be the refined and reformed versions of Basel I
accord.
The guidelines were based on three parameters which are as
follows-
Banks should maintain a minimum capital adequacy requirement of 8% of risk
assets.
Banks were needed to develop and use better risk management techniques in
monitoring and managing all the three types of risks that is credit and
increased disclosure requirements.
The three types of risk are- operational risk, market risk, capital risk.
Banks need to mandatory disclose their risk exposure, etc to the central bank.
Basel II norms in India and overseas are yet to be fully implemented.
The three pillars of BASEL-3 can be understand from the following figure---
BASEL-3
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Basel II and Basel III Norms - All that you Need to Know
Published on Monday, November 10, 2014
Today I am providing a useful write up on BASEL Accords, complying with the
many requests from readers.
1. Brief History:
The Basel Committee on Banking Supervision – is an international banking regulatory
committee formed to develop banking supervisory regulations. It was established by the Governors
of the Central Banks of a group of 10 countries (initially) in 1974.
The objective of the BCBS is to gain a better understanding of the challenges faced by modern
banking system in terms of risk and it risk management and to frame supervisory and regulatory
standards and guidelines to help the banking system diminish these risks and function properly
3. BASEL II:
The predecessor of BASEL III and successor of BASEL I, was in place during the global economic
meltdown, and showed the shortcomings in the existing regulatory and supervisory framework.
BASEL III is the result of the financial crisis of 2007-2008, which made
the BCBS feel that a more stringent supervisory guidelines were required to
prevent such mishaps from happening in the future;
Its aim, among other things, is to strengthen the banking sector to be
able to withstand such severe financial crisis without crumbling.
According to BCBS "Basel III is a comprehensive set of reform measures,
developed by the Basel Committee on Banking Supervision, to strengthen
the regulation, supervision and risk management of the banking sector".
This simply means that supervisory/regulatory controls are now improved and better in BASEL III,
than the previous Basel II.
The important Key elements of BASEL III and it’s difference from BASEL II can be understood as
follows:
(i) Capital and it’s stricter standards: BASEL III requires overall capital to be 10.5 % of the Risk
Weighted Assets (RWAs and important from exam/interview point of view!)
Where the BCBS recommends 10.5%, India has plans to achieve 11.5% of RWAs as the overall
capital, including Tier I, Tier II and Common Tier Equity and Capital Conservation Buffer (CCB)
at 2.5%
(ii) Capital conservation buffer (at 2.5%) has been introduced with the aim of ensuring that banks
maintain a buffer (like a cushion or a shock absorber) of capital – that can be utilized to withstand
losses and financial and economic crises.
(ii) Wholly implementation of BASEL III in India is marked for 31 March, 2019 (revised from
31.3.2018); while internationally it is 1 January, 2019.
I tried my best to concise the vast material available on BASEL just from exam point of view’s quick
reading and important points.