BASEL NORMS
- Group 18
INTRODUCTION
Basel is a city in Switzerland.
It is the headquarters of Bureau of International
Settlement (BIS).
The Bank for International Settlement (BIS) established
on 17 May 1930, with a common goal of financial stability
and common standards of banking regulations.
BIS has 60 member countries from all over the world and
covers approximately 95% of the world GDP.
Basel guidelines refer to broad supervisory standards
formulated by the group of central banks - called the Basel
Committee on Banking Supervision (BCBS).
Basel Committee on Banking Supervision
(BCBS)
BCBS provides a forum for regular cooperation on banking
supervisory matters.
Its objective is to enhance understanding of key supervisory
issues and improve the quality of banking supervision worldwide.
The set of agreement by the BCBS, 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. In fact,
on a few parameters the RBI has prescribed stringent norms as
compared to the norms prescribed by BCBS.
Main Expert Sub-Committees under BCBS
The Standards Implementation.
The Policy Development Group.
The Accounting Task Force.
The Basel Consultative Group.
CAPITAL ADEQUACY RATIO(CAR)
Capital adequacy provides regulators with a means
of establishing whether banks and other financial
institutions have sufficient capital to keep them out
of difficulty. Regulators use a Capital Adequacy Ratio
(CAR), a ratio of a bank’s capital to its assets, to
assess risk.
TOTAL CAPITAL
CAR =
RISK WEIGHTED ASSETS
TOTAL CAPITAL = Tier 1 capital + Tier 2 capital
RISK INVOLVED
Credit risk
Default by borrowers
Market risk
Interest rate risk
Foreign exchange risk
Commodity pricing risk
Operational risk
Fraud,
System and process failure.
BASEL – I NORMS
Introduced in the year 1988.
It focused almost entirely on credit risk.
The minimum capital requirement was fixed at 8% of risk
weighted assets.
India adopted Basel 1 guidelines in 1999.
The general purpose was to :
1. Strengthen the stability of international banking
system.
2. 2. Set up a fair and a consistent international banking
system in order to decrease competitive inequality
among international banks.
Basis of Capital in Basel – I
Tier I (Core Capital): Tier I capital includes stock
issues (or share holders equity) and declared
reserves, such as loan loss reserves set aside to
cushion future losses or for smoothing out income
variations.
Tier II (Supplementary Capital): Tier II capital
includes all other capital such as gains on
investment assets, long-term debt with maturity
greater than five years and hidden reserves (i.e.
excess allowance for losses on loans and leases).
However, short-term unsecured debts (or debts
without guarantees), are not included in the
definition of capital.
Risk Categorization According to
Basel I,
The total capital should represent at least 8% of the
bank’s credit risk.
Risks can be:
The on-balance sheet risk (like risks associated with
cash & gold held with bank, government bonds,
corporate bonds etc.)
Market risk including interest rates, foreign exchange,
equity derivatives & commodities.
Non Trading off-balance sheet risks like forward
purchase of assets or transaction related debt assets.
Pitfall of Basel 1
Limited differentiation of credit risk.
Static measure of default risk.
No recognition of term-structure of credit risk.
Simplified calculation of potential future
counterparty risk.
Lack of recognition of portfolio diversification
effects.
Basel – II Norms
Introduced in the year 1999.
The minimum capital requirement is fixed at 8% of
risk weighted assets.
India adopted basel 2 guidelines in 2009.
Basel – II norms are based on 3 pillars:
Minimum Capital – Banks must hold capital against
8% of their assets, after adjusting their assets for risk.
Supervisory Review – It is the process whereby
national regulators ensure their home country banks
are following the rules.
Market Discipline – It is based on enhanced
disclosure of risk .
Risk Categorization
In the Basel – II accord, Credit Risk, Market Risk and
Operational Risks were recognized.
Under Basel – II, Credit Risk has three approaches
namely, standardized, foundation internal ratings-
based (IRB), and advanced IRB.
Operational Risk has measurement approaches like
the Basic Indicator approach, Standardized
approach and the Advanced Measurement
approach.
Impact on Banking Sector
Capital Requirement
Wider Market
Products
Customers
Advantages of Basel II over I
The discrepancy between economic capital and
regulatory capital is reduced significantly, due to
that the regulatory requirements will rely on
banks’ own risk methods.
More Risk sensitive.
Wider recognition of credit risk mitigation.
Pitfalls of Basel – II norms
Too much regulatory compliance.
Over Focusing on Credit Risk.
The new Accord is complex and therefore demanding
for supervisors, and unsophisticated banks.
Strong risk differentiation in the new Accord can
adversely affect the borrowing position of risky
borrowers.
BASEL –III NORMS
Introduced in the year 2010.
India adopted basel 3 guidelines on 31st march
2019.
CAR- 10% TO 14% (India 11.5%)
Basel – III norms aim to:
1. Improving the banking sectors ability to absorb
shocks arising from financial and economic stress.
2. Improve risk management and governance.
3. Strengthen banks transparency and disclosures
Structure of Basel – III Accord
Minimum Regulatory Capital Requirements based
on Risk Weighted Assets (RWAs) : Maintaining
capital calculated through credit, market and
operational risk areas.
Supervisory Review Process : Regulating tools and
frameworks for dealing with peripheral risks that
banks face.
Market Discipline : Increasing the disclosures that
banks must provide to increase the transparency of
banks.
Major changes in Basel – III
Better Capital Quality
Capital Conservation Buffer
Counter cyclical Buffer
Minimum Common Equity and Tier I Capital
requirements
Leverage Ratios
Liquidity Ratios
Systematically Important Financial Institutions
Impact on Indian Banking System
Reduced Systematic Risk and absorb economic-
finance stress .
Challenge for Weaker Banks to survive.
Increased Supervisory Vigil.
Re-organisation of Institutions with more mergers
and acquisitions.
Chances of increased International Arbitrage.
Bank Capital – Increased NPA, reduced Tier II CAR
Ratio .
Increased Tier I capital requirement
References
Bank For International Settlements, “Basel
Committee on Banking Supervisions”, http://
www.bis.org/bcbs/index.htm
Investopedia ,
http://www.investopedia.com/articles/economics/
10/ understanding-basel-3-
regulations.asp#axzz26w2DIKab
Bank Credit Management by G.Vijayaraghavan,
Chapter – 14, pp- 170 - 171
CONCLUSION
One shoe doesn’t fit all. Basel 3 is an evolution & improvement
over Basel 2.
Though India was well positioned in financial crisis compare to
global economy, require to increase vigilance.
Private Banks and Foreign Banks are in advantageous position
against public sector banks in terms of - CAR, IT Infrastructure,
Better skilled persons.
PSBs would take more time to implement Basel 3.
Constant regulatory assessment towards sound practices followed
by banks.
Better approach to Risk Management, Effective Data
Management System and Effective & SPEEDY implementation
would help banks to stay competitive.
THANK YOU
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