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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