BASEL NORMS AND

DIVERSIFICTAION OF
FUNDS

BASEL I

Basel I Norms
In 1988, the Basel I Capital Accord was created.
The general purpose was to:
1. Strengthen the stability of international banking
system.
2. Set up a fair and a consistent international
banking system in order to decrease competitive
inequality among international banks.

Risk Categorization
According to Basel I, the total capital should
represent at least 8% of the banks credit
risk.
Risks can be:

On-balance sheet risk

Market risk

Non Trading off-balance sheet risk

Limitations of Basel I
Norms

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

THREE PILLARS

Minimum
Capital
Requirement
s

Supervisor
y Review

Market
Discipline

Advantages of Basel II

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.

Disadvantage of Basel II

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

Basel III Norms

Basel III norms aim to:

Improving the banking sector's ability to

absorb shocks arising from financial and
economic stress

Improve risk management and governance

Strengthen banks' transparency and

disclosures

Major changes in Basel - III

Better Capital Quality

Capital Conservation Buffer

Minimum Common Equity

Leverage Ratios

Systematically Important Financial Institutions

Thank
You