BASEL

• Is a city in Switzerland

• Is the headquarters of The Bank of

International Settlements (BIS), the
multinational financial institution for
settlement among nations, formed in
1930.
• The Basel Committee on Banking Supervision (BCBS)
was formed in 1974 by G 10 countries, under the
auspices of BIS

– following the failure of the Bankhaus Herstatt on 24.6.1974

which affected many countries, mostly the G10 countries.

– realising the need for healthy international banking to

catalyse the world trade

– Secretariat housed in BIS.

The committee comprises of representatives
from Central banks and regulatory
authorities.
Over a period of time, the focus of the committee
has evolved, enlarging initiatives designed to
• define roles of regulators in cross jurisdiction
situations
• ensure that international banks do not escape
comprehensive supervision by a ‘home’ regulatory
authority
• Promote a uniform capital requirements, so
banks from different countries may compete with
one another on ‘level playing field’
• The Basel committee does not have
legislative authority

• Participant countries are implicitly bound

to implement its recommendations with
feasibility to suit local economic
conditions.
• In 1988, the Basel committee proposed - set
of minimal capital requirements for banks
• These became law in G10 countries in 1992
• the requirements have come to be known as
the 1988 Basel Accord
• BCBS has 13 member countries and its
Accord principles are subscribed to and
implemented by more than 100 countries
including India
• RBI’s association with BCBS dates back to
1997 as India was among the 16 non-
member countries that were consulted in the
drafting of Basel Core principles.
• The 1988 Basel Accord i.e. Basel Accord I
primarily addressed banking with focus on
“CREDIT RISK’

• Banks were asked to provide capital at greater

than 8% on Risk Weighted Asset values

• Not withstanding the international stipulation of

8%, RBI has stipulated the Capital Adequacy
at 8% upto 31.3.99 and at 9% thereafter.
• Asdefined by Basel Committee a bank’s
capital comprises two tiers
Tier I - ‘ Core ‘ capital - comprising paid
up equity capital + General Reserves

Tier II - ‘ Supplementary’ capital

comprising specific reserves & preferred
stocks and long term subordinated debt.
Maximum - 50%
• In early 1990s, the committee updated the 1988
accord to include Market Risk also for capital
adequacy and was amended accordingly in
1996, capital requirement for Market Risk was
fixed at 2.5% based on various parameters

However, neither the original accord nor the

amendment, took into congnizance the “
Operational Risk” involved and the capital
requirement therefor.
• In 1999, the Basel Committee proposed a
New Capital Accord, known as Basel II.

• The finalised Basel II Accord was released

in June 2004 called “International
Convergence of Capital Measurement and
Capital Standards : a Revised Framework”
 BASEL II Accord was founded in - Three
Pillar approach to assess and manage
risks.

Pillar I - Capital Requirements

Pillar II - Supervisory role

Pillar III - Disclosure norms and Market

discipline
 Pillar I

Minimum Capital requirement to support the risks in

business, including operational risk.
Pillar II - Supervisory Role / Review to

• Ensure capital adequacy

• Encourage & use better risk management systems

• Internal assessment of capital and setting capital targets

commensurate with risk profile

• Management Responsibility for ensuring capital

adequacy beyond the core minimum
Pillar III - Market Discipline

To have appropriate disclosure to market

participants on

- Capital structure - components, terms,

Accounting policies etc.
- Risk exposure - quantitative & qualitative
- Capital Adequacy ( CAR)
Basel II Accord

- Retains the definition of capital &

market risk provisions
- treats the credit risk differently
- recommends capital for “ Operational
Risk”
The scope of this program is
restricted to the discussion on
“Operational Risk Management”
summing up …
• Basel II Accord aims at regulatory measures to make the banking
system more safe and stable
• It provides a finer approach towards Credit Risk Management /
Rating mechanism as opposed to “ One size fits all” approach of
Basel I towards risk management.
• Basel II deals with operational risk for the first time in addition
to credit risk and market risk and has also suggested capital
charge for OR
• In order to be competitively effective both nationally and
internationally it has become almost mandatory for all of us to pay
serious attention on the issues of ORM and effectively manage /
control this risk also in addition to credit risk and market risk
• At the unit (Branch) level, the OR assumes greater

significance in terms of

a) Branch’s operations
b) Business continuity plan implementation
c) Attached capital tag on the ORM quality
d) Its impact on Bank’s performance / results in the
emerging scenario.
Thank you