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Finance Department
Finhance Pvt Ltd.
About the BIS
Established on 17 May 1930
The BIS is the world’s oldest
international financial
organization
Head office is in Basel,
Switzerland and
representative offices in
Hong Kong SAR and in
Mexico City.
The BIS currently employs
around 550 staff from 50
countries.
List of Member Central Banks
Basel committee on Banking
Supervision – (BCBS)
A set of agreements
Regulations and recommendations on Credit risk ,
market risk and operational risk
Purpose – to have enough capital on account to meet
obligations and absorb unexpected losses
BASEL 1
In 1988, the Basel Committee(BCBS) in Basel,
Switzerland, published a set of minimal capital
requirements for banks, known as 1988 BaselAccord
or Basel 1.
Primary focus on credit risk
Assets of banks were classified and grouped in five
categories to credit risk weights of zero ‘0’, 10, 20, 50
and up to 100%.
Assets like cash and coins usually have zero risk
weight, while unsecured loans might have a risk
weight of 100%.
Capital Adequacy Ratio (CAR)

Expressed as a percentage of a bank's risk weighted

credit exposures.
Also known as "Capital to Risk Weighted Assets Ratio
(CRAR).

Ratio is used to protect depositors and promote the

stability and efficiency of financial systems around the
world.
Purpose of Basel 1
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
Achievement :
to set up a minimum risk-based capital adequacy
applying to all banks and governments in the world
Basel Norms & Indian Banking
System
Basel Accord I. was established in 1988 and was
implemented by 1992 in India.
over 3 years – banks with branches abroad were
required to comply fully by end March 1994 and the
other banks were required to comply by end March
1996.
RBI norms on capital adequacy at 9% are more
stringent than Basel Committee stipulation of 8%.
Commercial Banks , Cooperative Banks and Reginal
rural banks banks have different RBI guidelines
Pitfalls of Basel I
Limited differentiation of credit risk
(0%, 20%, 50% and 100%)
Static measure of default risk
The assumption that a minimum 8% capital ratio is sufficient to
protect banks from failure does not take into account the
changing nature of default risk.
No recognition of term-structure of credit risk
The capital charges are set at the same level regardless of the
maturity of a credit exposure.
Simplified calculation of potential future counterparty risk
The current capital requirements ignore the different level of
risks associated with different currencies and macroeconomic
risk. In other words, it assumes a common market to all actors,
which is not true in reality.
Lack of recognition of portfolio diversification effects
In reality, the sum of individual risk exposures is not the same as
the risk reduction through portfolio diversification. Therefore,
summing all risks might provide incorrect judgment of risk
Conclusion
Basel 1- Milestone in Finance and Banking History
It launched the trend toward increasing risk
modeling research
However, its over-simplified calculations, and
classifications have simultaneously called for its
disappearance, paving the way for the Basel II Capital
Accord
It led to further agreements as the symbol of the
continuous refinement of risk and capital
Thank You…