BASEL I TO BASEL II TO BASEL III

INTRODUCTION:
Banks by their very nature of their business attracts several types of risks, viz., credit risk,
market risk (which includes interest rate risk, foreign exchange risk and liquidity risk),
operational risk, reputational risk, business risk, strategic risk, systemic risk to cite a few.
Banks are exposed to these risks because of the business of banking which they undertake,
which is defined in section 5 (b) of the Banking Regulation Act, 1949 as, "banking" means
the accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.
Section 5 (c) further defines, "banking company" means any company which transacts the
business of banking in India. This is also called the process of intermediation, which causes
to for the above risks to happen. Section 6 (subsections A to O) of the Banking Regulation
Act, 1949, further defines the functions of banks, which further exposes the banks to the
above risks.
We give below the following definitions of the above risks, for our common understanding in
the discussions which follows:
1. Credit Risk: Risk that the counterparty will fail to perform or meet the obligation on the
agreed terms. The common types of credit risks are:
(i) Transaction Risk: Risk relating to specific trade transactions, sectors or groups.
(ii) Portfolio Risk: Risk arising from concentrated credits to a particular sector / lending to a
few big borrowers/lending to a large group.
2. Market Risk: Market risk is the risk to a bank’s financial condition that could result from
adverse movements in market price. The types of market risks are:
(i) Interest Rate Risk: Risk felt, when changes in the interest rate structure put pressure on
the net interest margin of the Bank. The various types of interest rate risks are detailed below:
(a) Gap/Mismatch risk: It arises from holding assets and liabilities and off balance sheet
items with different principal amounts, maturity dates and re-pricing dates thereby creating
exposure to unexpected changes in the level of market interest rates.
(b) Basis risk: It is the risk that the Interest rate of different Assets/liabilities and off
balance items may change in different magnitude. The degree of basis risk is fairly high in
respect of banks that create composite assets out of composite liabilities.
(c) Embedded option risk: Option of pre-payment of loan and fore- closure of deposits
before their stated maturities constitute embedded option risk
(d) Yield curve risk: Movement in yield curve and the impact of that on portfolio values
and income.
(e) Re-price risk: When assets are sold before maturities.
(f) Reinvestment risk: Uncertainty with regard to interest rate at which the future cash
flows could be reinvested.
(g) Net interest position risk: When banks have more earning assets than paying
liabilities, net interest position risk arises in case market interest rates adjust downwards.
(ii) Foreign Exchange or Forex Risk: This risk can be classified into three types.
(a) Transaction Risk is observed when movements in price of a currency upwards or
downwards, result in a loss on a particular transaction.
(b) Translation Risk arises due to adverse exchange rate movements and change in the
level of investments and borrowings in foreign currency.
(c) Country Risk. The buyers are unable to meet the commitment due to restrictions
imposed on transfer of funds by the foreign govt. or regulators.
When the transactions are with the foreign govt. the risk is called as Sovereign Risk.

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(3) Liquidity Risk: Risk arising due to the potential for liabilities to drain from the Bank at a
faster rate than assets. Liquidity risk for banks mainly manifests on account of the following:
(a) Funding Liquidity Risk – the risk that a bank will not be able to meet efficiently the
expected and unexpected current and future cash flows and collateral needs without affecting
either its daily operations or its financial condition.
(b) Market Liquidity Risk – the risk that a bank cannot easily offset or eliminate a
position at the prevailing market price because of inadequate market depth or market
disruption.
(4) Operational Risk arises as a result of failure of operating system in the bank due to
certain reasons like fraudulent activities, natural disaster, human error, omission or sabotage
etc.
(5) Systemic Risk is seen when the failure of one financial institution spreads as chain
reaction to threaten the financial stability of the financial system as a whole.
(6) Business Risk: These are the risks that the bank willingly assumes to create a competitive
advantage n add value to its shareholders. It pertains to the product market in which the bank
operates, and includes technological innovations, marketing n product design. A bank with a
pulse on the market and driven b technology as well as a high degree of customer focus,
could be relatively protected against this risk.
(7) Strategic Risk: This risk results from a fundamental shift in the economy or political
environment. Strategic risks usually affect the entire industry and are much more difficult to
protect themselves. A few examples are: the fall of Berlin Wall, Disintegration of Soviet
Empire; South East Asian Banking Crisis in1997, 2008 Subprime lending crisis, the recent
European Economic Crisis; to name a few.
(8) Reputation Risk: Reputation risk is the potential loss that negative publicity regarding an
institution’s business practices, whether true or not, will cause a decline in the customer base,
costly litigation, or revenue reductions (financial loss).

PRIOR TO BASEL I SCENARIO:

The Reserve Bank of India, the central bank and the chief regulator of the banking system in
India, were conscious of the ever increasing dimensions of various risks faced by the banking
system in India and have been initiating steps in this directions. As we will see below, Basel I
norms were introduced only in 1992, and that to in a phased manner over a period of four
years, however, RBI had introduced measures for managing liquidity risk, forex risk and
credit risk (through the Health Code Systems 1985-86) in the Indian banking system. The
Health Code system, inter alia, provided information regarding the health of individual
advances, the quality of the credit portfolio and the extent of advances causing concern in
relation to total advances. It was considered that such information would be of immense use
to banks for control purposes. The RBI advised all commercial banks (excluding foreign
banks, most of which had similar coding system) on November 7, 1985, to introduce the
Health Code System indicating the quality (or health) of individual advances under the
following eight categories, with a health code assigned to each borrower’s account (source:
RBI):
1. Satisfactory - conduct is satisfactory; all terms and conditions are complied with; all
accounts are in order and safety of the advance is not in doubt.
2. Irregular- the safety of the advance is not suspected, though there may be occasional
irregularities, which may be considered as a short term phenomenon.
3. Sick, viable - advances to units that are sick but viable - under nursing and units for which
nursing/ revival programmes are taken up.

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4. Sick: nonviable/sticky - the irregularities continue to persist and there are no immediate
prospects of regularisation and the accounts could throw up some of the usual signs of
incipient sickness
5. Advances recalled - accounts where the repayment is highly doubtful and nursing is not
considered worthwhile and where decision has been taken to recall the advance
6. Suit filed accounts - accounts where legal action or recovery proceedings have been
initiated
7. Decreed debts - where decrees (verdict) have been obtained.
8. Bad and Doubtful debts - where the recoverability of the bank's dues has become
doubtful on account of short-fall in value of security, difficulty in enforcing and realising the
securities or inability/ unwillingness of the borrowers to repay the bank's dues partly or
wholly.
Under the above Health Code System, the RBI classified problem loans of each bank into
three categories: i) advances classified as bad and doubtful by the bank (Health Code No.8)
(ii) advances where suits were filed/decrees obtained (Health Codes No.6 and 7) and (iii)
those advances with major undesirable features (Health Codes No.4 and 5)1. Measures taken
by RBI for Liquidity risk management included banks to report their liability and asset
position fortnightly to RBI, a regulated inter-bank borrowing market and RBI playing the role
of lender of the last resort. These efforts were by and large in managing liquidity risks in a
pre Basel I scenario. Similarly, for foreign exchange risk management banks had a cap on
their open position, along with forward cover restricted to 180 days and RBI closely
monitoring the volatility and managing it as the ultimate buyer/ seller to prevent excessive
movement.

1. THE BASEL I NORMS:

The deterioration of asset quality of banks has caused major turmoil across the world,
renewing interest in bank regulation. Since 1980over 130 countries, comprising almost three
fourth of the International Monetary Fund‘s member countries, have experienced significant
banking sector distress. This is particularly problematic as banks universally face the
dilemma of balancing profitability and stability. The Basel Capital Accord in 1988 proposed
by Basel Committee of Bank Supervision (BCBS) of the Bank for International Settlement
(BIS) focused on reducing credit risk, prescribing a minimum capital risk adjusted ratio
(CRAR) of 8percent of the risk weighted assets. Although it was originally meant for banks
in G10 countries, more than 190 countries claimed to adhere to it, and India began
implementing the Basel I in April 1992.
The standards are almost entirely addressed to credit risk, the main risk incurred by banks.
The document consists of two main sections, which cover
a. the definition of capital and
b. the structure of risk weights.
Based on the Basle norms, the RBI also issued similar capital adequacy norms for the Indian
banks. According to these guidelines, the banks will have to identify their Tier- I and Tier-II
capital and assign risk weights to the assets. Having done this they will have to assess the
Capital to Risk Weighted Assets Ratio (CRAR).

Tier-I Capital
 Paid-up capital
 Statutory Reserves
 Disclosed free reserves
 Capital reserves representing surplus arising out of sale proceeds of assets

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Equity investments in subsidiaries, intangible assets and losses in the current period and those
brought forward from previous periods will be deducted from Tier I capital.

Tier-II Capital
 Undisclosed Reserves and Cumulative Perpetual Preference Shares
 Revaluation Reserves
 General Provisions and Loss Reserves

Advantages of Basel I
 Substantial increases in capital adequacy ratios of internationally active banks;
 Relatively simple structure;
 Worldwide adoption;
 Increased competitive equality among internationally active banks;
 Greater discipline in managing capital;
 A benchmark for assessment by market participants.

Weaknesses of Basel I
 In spite of advantages and positive effects, weaknesses of Basel I standards eventually
became evident:
 Capital adequacy depends on credit risk, while other risks (e.g. market and operational) are
excluded from the analysis;
 In credit risk assessment there is no difference between debtors of different credit quality
and rating;
 Emphasis is on book values and not market values;
 Inadequate assessment of risks and effects of the use of new financial instruments, as well
as risk mitigation techniques.
Some of the weaknesses of Basel I, especially those related to market risk, were overbridged
by the amendment to recommendations from 1993 and 1996, by means of introducing capital
requirements for market risk.

2. Basel II
On June 26, 2004, The Basel Committee on Banking Supervision released “International
Convergence of Capital Measurement and Capital Standards: A revised Framework”, which
is commonly known as Basel II Accord. Basel 1 initially had Credit Risk and afterwards
included Market Risk. In Basel 2, apart from Credit & Market Risk; Operational Risk was
considered in Capital Adequacy Ratio calculation.
The Basel 2 Accord focuses on three aspects:
2.1 Minimum Capital Requirement
2.2 Supervisory Review by Central Bank to monitor bank’s capital adequacy and internal
assessment process.
2.3 Market Discipline by effective disclosure to encourage safe and sound banking practices

Basel II
Pillar 1 Pillar 2 Pillar 3
Minimum Regulatory Capital Supervisory Review Process Market Discipline
• Credit Risk
• Market Risk
• Operational Risk

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2.1 Pillar 1: Minimum Regulatory Capital
The calculation of Minimum Regulatory Capital is extension of 1988 Basel Accord. Basel II
also considers Operational Risk apart from Credit & Market Risk. Another major difference
between Basel 1 and Basel II is inclusion of flexibility in approaches for Risk Weighted
Assets Calculation.
For calculation of Capital to Risk weighted Asset Ratio (CRAR), the formulae are similar to
BASEL 1 accord.
Total CRAR = [Eligible total capital funds]/ [Credit RWA + Market RWA + Operational
RWA]
Tier I CRAR = [Eligible Tier I capital funds]/ [Credit RWA* + Market RWA + Operational
RWA]
* RWA = Risk weighted Assets

Basel 2 has recommended at least 8% CRAR and 4% Tier 1 CRAR, whereas RBI has given
guidelines for at least 9% CRAR and 6% Tier 1 CRAR.
So calculation of CRAR is dependent on two major factors
1. Eligible Total Capital Funds
2. Risk Weighted Assets
2.1.1 Eligible Capital: The eligible capital includes Tier 1 (core) capital and Tier 2
(additional or supporting) capital. Tier 1 capital is more stable and risk absorbing than Tier 2
capital. Main components of Tier 1 & Tier 2 capital are:
Tier 1 Capital Tier 2 Capital
1. Paid up Capital, Statutory Reserves, 1. Revaluation Reserve (at a discount of
disclosed free reserves 55%)
2. Capital Reserve (E.g. Surplus from sales of 2. General Provision & Loss Reserves
assets)
3. Eligible Innovative Perpetual Debt 3. Hybrid Debt Capital Instruments: Eg.
Instruments(IPDI)- upto 15% of Tier 1 Perpetual Cumulative Preference Shares,
Capital Redeemable Non-Cumulative Preference
Share, Redeemable Cumulative Preference
Share
4. Perpetual Non-Cumulative Preference 4. Subordinate Debt: fully paid up,
Shares (PNPS) - 3 & 4 can be max 40% of unsecured, subordinated to other creditors,
Tier1 free of restrictive clauses
5. Remaining IPDI & PNPS from Tier1
2.1.2 Risk Weighted Assets: Another Important aspect in calculation of CRAR is calculation
of Risk weighted assets. Basel II gives advantage to the banks with better asset quality and
advanced system. The capital requirement reduces with better asset quality as lesser risk
weights can be assigned to good assets. The various approaches for calculation of Risk
Weighted Assets calculation are:
Type of Risk/ Simple to Most Sophisticated & Advanced Approach
Approach
Credit Risk Standardized Foundation Internal Advanced Internal
Approach Rating Based Rating Based
Approach Approach
Market Risk Standardized Internal Model
Approach Approach
Operational Risk Basic Indicator Standardized Advanced
Approach Approach Measurement
Approach

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2 Pillar 2: Supervisory Review:
Basel II had given powers to the regulators to supervise and check bank’s risk management
system and capital assessment policy. The regulators can also ask for buffer capital apart
from minimum capital requirement by BCBS. RBI has asked for 9% CRAR, which is more
than 8% prescribed by BCBS. . Regulators are given the power to oversee the internal risk
evaluation regimes proposed in Pillar I.
Pillar 2 provides a tool to supervisors to keep checks on the adequacy of capitalisation levels
of banks and also distinguish among banks on the basis of their risk management systems and
profile of capital. Pillar 2 allows discretion to supervisors to (a) link capital to the risk profile
of a bank; (b) take appropriate remedial measures if required; and (c) ask banks to maintain
capital at a level higher than the regulatory minimum.
2.3 Pillar 3: Market Discipline
The Pillar III had made disclosure of a bank’s risk taking positions & capital, mandatory.
This step was targeted to introduce market discipline through disclosure.
Basel II has rewarded banks with better asset quality and the risk weights lower due to risk
sensitivity of Basel II. On an average Indian Banks’s CRAR become better due to use of
Basel II.
Pillar 3 provides a framework for the improvement of banks’ disclosure standards for
financial reporting, risk management, asset quality regulatory sanctions, and the like. The
pillar also indicates the remedial measures that regulators can take to keep a check on erring
banks and maintain the integrity of the banking system. Further, Pillar 3 allows banks to
maintain confidentiality over certain information, disclosure of which could impact
competitiveness or breach legal contracts.

3. BASEL III
Basel III guidelines were released in December 2010. The financial crisis of 2008 was the
main reason behind the introduction of these norms. A need was felt to further strengthen the
system as banks in the developed economies were under-capitalised, over-leveraged and had
a greater reliance on short term funding. Also the quantity and quality of capital under Basel
II were deemed insufficient to contain any further risk.
These norms aim at making most banking activities such as their trading book activities more
capital intensive. The purpose is to promote a more resilient banking system by focusing on
four vital banking parameters viz. Capital, Leverage, Funding and Liquidity.
Features of the Proposed Basel III Accord
1.Enhanced Capital Requirement: New requirements represent tighter definitions of
Common Equity. Banks will be required to hold more reserves by January 1, 2015, with
Common Equity requirements raised to 4.5% from 2% at present. Tier 1 Capital
requirements: Under the new rules, the mandatory reserve (known as Tier 1 capital) will be
raised from 4% to 6% by 2015.
Banks in India are required to maintain a minimum Pillar 1 Capital to Risk weighted Assets
Ratio (CRAR) of 9 % on an on-going basis (other than capital conservation buffer and
countercyclical capital buffer).With a view to improving the quality and quantity of
regulatory capital, it has been decided that the predominant form of Tier 1 capital must be
Common Equity; since it is critical that banks’ risk exposures are backed by high quality
capital base. Non-equity Tier 1 and Tier 2 capital would continue to form part of regulatory
capital subject to eligibility criteria as laid down in Basel III. Accordingly, under revised
guidelines (Basel III), total regulatory capital will consist of the sum of the following
categories:
(i) Tier 1 Capital (going-concern capital)

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• (a) Common Equity Tier 1
• (b) Additional Tier 1
(ii) Tier 2 Capital (gone-concern capital)

2. Introduction of a Capital Conservation Buffer

The Capital Conservation Buffer is an additional reserve buffer of 2.5% to "withstand future
periods of stress", bringing the total Tier 1 Capital reserves required to 7%. This buffer is
introduced to meet one of the four key objectives identified by the Committee in the
December 2009 Consultative Document “Strengthening the resilience of the banking sector”;
conserve enough capital to build buffers at individual banks and the entire banking sector
which can then be used in times of stress.
If a bank has complied with the minimum Common Equity Tier 1 and Tier 1 capital ratios,
then the excess Additional Tier 1 capital can be admitted for compliance with the minimum
CRAR of 9% of RWAs. In addition to the minimum Common Equity Tier 1 capital of 5.5%
of RWAs, banks are also required to maintain a capital conservation buffer (CCB) of 2.5% of
RWAs in the form of Common Equity Tier 1 capital. Thus, with full implementation of
capital ratios and CCB the capital requirements are summarised as follows:
Regulatory Capital As % to RWAs
(i) Minimum Common Equity Tier 1 ratio 5.5
(ii) Capital conservation buffer (comprised of Common Equity) 2.5
(iii) Minimum Common Equity Tier 1 ratio plus capital conservation 8.0
buffer [(i)+(ii)]
(iv) Additional Tier 1 Capital 1.5
(v) Minimum Tier 1 capital ratio [(i) +(iv)] 7.0
(vi) Tier 2 capital 2.0
(vii) Minimum Total Capital Ratio (MTC) [(v)+(vi)] 9.0
(viii Minimum Total Capital Ratio plus capital conservation buffer 11.5
) [(vii)+(ii)]

3. Introduction of Countercyclical Buffer

According to the new rules local regulators are not only responsible for controlling banks’
compliance with the Basel requirements but also for regulating credit volume in their national
economies. If credit is expanding faster than GDP, bank regulators can increase their capital
requirements with the help of the Countercyclical Buffer. Varying between 0% - 2.5% it can
thus, preserve national economies from excess credit growth.
4. Leverage Ratio (Ratio of Tier 1 Capital to Total Assets)
Capital requirements are supplemented by a non-risk-based leverage ratio that will serve as a
backstop to the risk-based measures described above. According to Basel III; Tier 1 Capital
has to be at least 3% of Total Assets even where there is no risk weighting. The Basel III
rules agree to test a minimum Tier 1 leverage ratio of 3% during the parallel run period by
2017. For the Indian Banks the provisions relating to leverage ratio contained in the Basel III
document are intended to serve as the basis for testing the leverage ratio during the parallel
run period. The Basel Committee will test a minimum Tier 1 leverage ratio of 3% during the
parallel run period from 1 January 2013 to 1 January 2017. During the period of parallel run,
banks should strive to maintain their existing level of leverage ratio but, in no case the
leverage ratio should fall below 4.5%. A bank whose leverage ratio is below 4.5% may
endeavour to bring it above 4.5% as early as possible. Final leverage ratio requirement would
be prescribed by RBI after the parallel run taking into account the prescriptions given by the
Basel Committee.

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5. Liquidity Risk Measurement: Basel III introduces a new instrument for liquidity risk
measurement – Liquidity Coverage Ratio (LCR). It is designed to ensure that a bank
maintains an adequate level of unencumbered, high-quality assets that can be converted into
cash to meet its liquidity needs for a 30-day time horizon under an acute liquidity stress
scenario specified by supervisors. The standard requires that the ratio be no lower than 100%.
Its implementation is planned for 2015. To ensure that investment banking inventories, off-
balance sheet exposures, securitization pipelines and other assets and activities are funded
with at least a minimum amount of stable liabilities in relation to their liquidity risk profiles
the new Accord introduces Net Funding Stability Ratio (NFSR). It is defined as the ratio, for
a bank, of its “available amount of stable funding” divided by its “required amount of stable
funding”. The standard requires that the ratio be no lower than 100%.

Transition Phase for the Liquidity Standards under Basel III: Both the LCR and NSFR
are currently subject to an observation period by the BCBS, with a view to addressing any
unintended consequences that the standards may have for financial markets, credit extension
and economic growth. At the latest, any revisions would be made to the LCR by mid-2013
and to the NSFR by mid-2016. Accordingly, the LCR, including any revisions, will be
introduced as on 1 January 2015 and the NSFR, including any revisions, will move to a
minimum standard by 1 January 2018. The LCR and NSFR will thus become binding for the
banks from 1 January 2015 and 2018, respectively i.e. banks will have to ensure that they
maintain the required LCR and NSFR at all times starting from January 2015 and January
2018, respectively. While the LCR and NSFR standards would become binding only from
January 2015 and 2018, respectively, the supervisory reporting under the Basel III framework
is expected from 2012. Accordingly, banks are required to furnish statements on LCR and
NSFR and statements based on monitoring metrics/tools prescribed under Basel III
framework to Chief General Manager-in-Charge, Department of Banking Operations and
Development (DBOD), Central Office, Reserve Bank of India, Mumbai on best efforts basis
from the month ending /quarter ending June 2012.

How is Basel III an improvement over Basel II?

The enhancements of Basel III over Basel II come primarily in four areas: (i) augmentation in
the level and quality of capital; (ii) introduction of liquidity standards; (iii) modifications in
provisioning norms; and (iv) better and more comprehensive disclosures.
(i) Higher Capital Requirement: As can be seen from the comparative data in the Table ,
Basel III requires higher and better quality capital. The minimum total capital remains
unchanged at 8 per cent of risk weighted assets (RWA). However, Basel III introduces a
capital conservation buffer of 2.5 per cent of RWA over and above the minimum capital
requirement, raising the total capital requirement to 10.5 per cent against 8.0 per cent under
Basel II. This buffer is intended to ensure that banks are able to absorb losses without
breaching the minimum capital requirement, and are able to carry on business even in a
downturn without deleveraging. This buffer is not part of the regulatory minimum; however,
the level of the buffer will determine the dividend distributed to shareholders and the bonus
paid to staff.
(ii) Liquidity Standards: To mitigate liquidity risk, Basel III addresses both potential short-
term liquidity stress and longer-term structural liquidity mismatches in banks’ balance sheets.
To cover short-term liquidity stress, banks will be required to maintain sufficient high-quality
unencumbered liquid assets to withstand any stressed funding scenario over a 30-day horizon
as measured by the liquidity coverage ratio (LCR). To mitigate liquidity mismatches in the
longer term, banks will be mandated to maintain a net stable funding ratio (NSFR). The
NSFR mandates a minimum amount of stable sources of funding relative to the liquidity

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 profile of the assets, as well as the potential for contingent liquidity needs arising from off-
balance sheet commitments over a one year horizon. In essence, the NSFR is aimed at
encouraging banks to exploit stable sources of funding.
(iii) Provisioning norms: The Basel Committee is supporting the proposal for adoption of an
‘expected loss’ based measure of provisioning which captures actual losses more
transparently and is also less procyclical than the current ‘incurred loss’ approach. The
expected loss approach for provisioning will make financial reporting more useful for all
stakeholders, including regulators and supervisors.
(iv) Disclosure requirement: The disclosures made by banks are important for market
participants to make informed decisions. One of the lessons of the crisis is that the disclosures
made by banks on their risky exposures and on regulatory capital were neither appropriate
nor sufficiently transparent to afford any comparative analysis. To remedy this, Basel III
requires banks to disclose all relevant details, including any regulatory adjustments, as
regards the composition of the regulatory capital of the bank.

Comparative Analysis Basel 1, 2 & 3 at a glance

Basel 1 Basel 2 Basel 3
Types of Credit Risk Credit Risk, Credit Risk
Risk Market Risk Market Risk & Market Risk
Covered Operational Risk Operational
Risk
Liquidity
Risk
Counter
Cycle Risk
Main tools Capital to 1. CRAR 1.CRAR
of Risk Risk 2. Supervisory Review 2.Supervisor
Management Weighted 3. Market Discipline y Review
Assets Ratio 3.Market
(CRAR) Discipline
4.Liquidity
Coverage
Ratio
5.Counter
cycle Buffer
6.Capital
Conservation
Buffer
7.Leverage
Ratio
Ways of • Simple but • From Simple to Complex & flexible Approach Same as
Calculation standard • Lesser Risk Weights in Complex Approaches Basel 2 but
of Risk •4 major Type of Method 1 Method 2 Method 3 additional
Weighted risk Risk capital for
Assets and categories Credit Standardize Foundation Advanced Capital
CRAR of assets Risk d Approach Internal Internal Conservation
and risk Rating Rating & Contra
weights Based Based Cyclical
according to Market Standardize Internal Model Approach Buffer
it Risk d Approach

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 Operationa Basic Standardize Advanced
l Indicator d Approach Measuremen
Approach Approach t
Approach
Major First 1. Covered Operational risk apart from credit & market • Liquidity
Contribution Internationa risk Risk
l 2. Recognized differentiation & brought flexibility Management
Measure to 3. Better asset quality helped banks to reduce Capital • Will help to
cover Requirements build capital
banking during good
risk time, which
can be used
in stressed
situation by
Counter
Cycle Buffer
• Introduction
of Capital
Conservation
Buffer
Limitations •Too simple 1. Additional Capital requirement for Op. Risk •
to cover all 2. Higher capital requirement in stressed situation as asset Requirement
risks quality reduces. Capital markets also dry at that time. of additional
• Banks had 3. High costs for up gradation of technology, disclosure CRAR
to raise & information system between
additional 4. Increased supervisory review required in case of 2.5% to 5%
capital advanced approaches • Increased
5. Subprime crises exposed the inadequate credit & requirement
liquidity risk covers of banks of common
equity share
capital also.
Minimum CRAR= 8% CRAR= 8% CRAR=
CRAR Tier 1= 4% 10.5% TO
according 13%
to BCBS Tier 1= 6%
Common
Equity= 4.5%
Minimum CRAR= 9% CRAR= 9% CRAR=
CRAR Tier 1= 6% 11.5%
according Common Equity= 3.6% Tier 1 = 7%
to RBI GOI recommended CRAR for PSU= 12% Common
Equity= 5.6%
Introduction 1988: Credit 2004 2010
Risk; 1996:
Market Risk
Implementatio 1994 First Phase: 2008: Foreign Banks in India, Indian Banks 2013 to 2018
n in India: with presence outside India: Basic Approaches in phased
Time Second Phase:2009: Other Scheduled Commercial Banks manner
line Till 2014: Complete Implementation

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______________________________________________________________________

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