Professional Documents
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Basel
Basel
Basel
By:
Vivek Yadav
Virender Thakur
Introduction
In banking entity assets are created as a process of intermediation by accepting deposits; the
basic function of intermediation itself is a source of credit and liquidity risks for any banking
institution. Further, banks are exposed to various market and non-market risks in performing
their functions. These risks expose banks to events, both expected and unexpected, with the
potential to cause losses, putting depositors money at risk. Expected losses may be mitigated
by a combination of product pricing and accounting loss provisions, while capital funds are
expected to meet unexpected losses. Thus the primary role of capital in a banking institution
is to meet the unexpected losses arising out of portfolio choice of banks and to protect the
depositors money.
1. Basel III aims to introduce much stricter definition of capital. Better quality capital means
higher loss-absorbing capacity. This in turn will mean that banks will be stronger, allowing
them to better withstand periods of stress.
2. By introduction of Basel III, banks will be required to hold a capital conservation buffer of
2.5%. The aim of asking to build conservation buffer is to ensure that banks maintain a
cushion of capital that can be used to absorb losses during periods of financial and economic
stress.
3. The counter cyclical buffer has been introduced with the objective to increase capital
requirements in good times and decrease the same in bad times. The buffer will slow banking
activity when it overheats and will encourage lending when times are tough i.e. in bad times.
The buffer will range from 0% to 2.5%, consisting of common equity or other fully lossabsorbing capital.
4. The minimum requirement for common equity, the highest form of loss-absorbing capital,
has been raised under Basel III from 2% to 4.5% of total risk-weighted assets. The overall
Tier 1 capital requirement, consisting of not only common equity but also other qualifying
financial instruments, will also increase from the current minimum of 4% to 6%. Although
the minimum total capital requirement will remain at the current 8% level, yet the required
total capital will increase to 10.5% when combined with the conservation buffer.
5. Under Basel III, a framework for liquidity risk management will be created. A new
Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are to be introduced
in 2015 and 2018, respectively.
Basel: Summary and Recommendation
The Basel norms, at some level, aim to create a global banking system that is fairly
homogenous. While this very aim purports to build a more robust financial system, it may
actually be its undoing.
The Basel norms also fail to consider national competencies. We have a global scenario
where individual countries vastly differ in their extent of development. In an age where
international banks are so prevalent, such differences across geographies can become tricky
to deal with.
The Basel accords need to incorporate, in some form, the element of national competencies
so as to create a level-playing field. While the Basel accords aim to bring along a host of
benefits, they inevitably imply high costs for the adopting nations. This is especially true
because there is no single set of dates corresponding to the implementation of a particular
Basel regulation worldwide.
This lack of synchronization in the adoption of the norms dilutes their efficacy. The proposal
of phases and timelines for implementation should be put forth in a manner that ensures a fair
amount of coordinated adoption.
o
f
Q2(2014)
Q1 (2015)
Quarter
N
P
A
In the case study there are some predictions made by the ICRA on NPAs as shown in the
graph.
Basically two problems are given for high NPA in Public Sector Banks.
1. High NPA due to ineffective governance in PSU Banks
2. Weakness of the credit appraisal procedures followed by the banks
PROBLEM 1: High NPA due to ineffective governance in PSU Banks
MEASURES:
1. Bring down the government's control over banks: As per the various ET Reports NPA
of the bank are also increasing due to the high involvement of the government in the
form of cutting interest rates in spite of interest rates in the economy are good. So by
loosening the control over banks, they will be free to take independent decisions.
2.
3. By eliminating crony capitalism in the various public sector banks and have
Responsible decision making teams
4. Recognize legitimate interests of stakeholders, whether they are genuinely interested
in investing this money for their projects or not. These stakeholders are people to
whom we are giving the loan.
PROBLEM 2: Weakness of the credit appraisal procedures followed by the banks
MEASURES:
1.
2.
NPA
GROSS NPA
2014
2013
2012
NET NPA
0.27%
0.20%
0.18%
0.98%
0.97%
1.02%
HDFC Bank is one of the Indian Banks which has been successfully able to keep the NPAs
least in the Banking Industry.
The reasons for its success to keep NPAs low are:
In order to avoid non-performing assets HDFC sends the names of the defaulters to
other banks and itself verifies from other banks.
HDFC recommends that there should be complete exposure of defaulters to all the
banks.
HDFC has a strong structure in place for minimizing the NPAs. Similarly, the
government should define and implement a strong legal structure regarding nonperforming accounts.
Common
Equity Tier
1
Minimum
4.5%
Conservation buffer
2.5%
Tier 1
Total
Capital
Capital
6%
8%
8.5%
10.5%
0% - 2.5%
2017
2018
2019
Capital Ratio
Leverage ratio
Migration
to Pillar I
4.5%
capital ratio
0.625%
1.25%
1.875%
2.5%
5.75%
6.375%
7.0%
80%
100%
100%
plus capital
conservation
buffer
20%
40%
60%
CET1
8.0%
Minimum total
8.0%
conservation buffer
capitaland
6.0%
8.0%
8.625%
9.25%
9.875%
10.5%
no
Liquidity ratio
60%
70%
80%
90%
(minimum)
Introduce
minimum
standard
100%