BASEL COMMITTEE ON BANKING SUPERVISION

Created

by the central bank governers of the group of ten nations. Created on 26th June 1974 and meets regularly 4 times a year Committee usually meets at the Bank for International Settlements (BIS) in Basel, Switzerland, where its 12 member permanent secretariat is located Present Chairman- Nout Wellink ( President of Netherland Bank)

Basel-I Accord
In

1988 Basel Accord 1 was created & it enforced by law in G-10 IN 1992

OBJECTIVES:
Strengthen the stability of international banking system. - Set up a fair and a consistent international banking system in order to decrease competitive inequality among international banks.
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Risk Weight 0% 20% 50% 100%

Asset class

Sovereign papers, Treasury bond

Municipal bond, corporate securities Any other banks

Residential mortgage Unsecured loans

LIMITATIONS
LIMITED

RISK EMPHASIZING ONLY CREDIT RISK NO RECOGNITION OF TERM STRUCTURE LACK OF RECOGNITION OF PORTFOLIO DIVERSIFICATION EFFECTS

DIFFERENTIATION OF CREDIT

Basel-ii
Objective

Ensuring that capital allocation is more risk sensitive; Separating operational risk from credit risk, and quantifying both;

THREE PILLARS
Pillar-1

(Minimum Capital Requirement) Pillar-2 (Supervisory review process) Pillar-3 (Market Discipline)

Basel 2 underlying principles

Banks

should have capital appropriate for their risk taking activities (Pillar 1) Banks should be able to properly assess the risk they are taking, and supervisors should be able to evaluate the soundness of these assessments (Pillar 2) Banks should be disclosing pertinent information necessary to enable market mechanism to complement the supervisory oversight function (Pillar 3)

Pillar 2 (Supervisory review)

Banks

should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels; should review and evaluate banks internal capital adequacy assessments and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. Supervisors should take appropriate supervisory action if they are not satisfied with the result of this process;

Supervisors

 Supervisors

should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum; Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained or restored.

Pillar 3 (Market discipline)

Proposes

an extensive list of bank disclosure requirements Recognizes that markets contain disciplinary mechanisms that reward banks that manage risk effectively and penalize those whose risk management is inept or imprudent

Broad classification of required disclosures: 1. Scope of application 2. Capital structure 3. Capital adequacy 4. Credit risk exposure and assessment 5. Credit risk mitigation 6. Market risk exposure and assessment 7. Operational risk exposure and assessment 8. Equity exposure and assessment 9. Securitization exposure and assessment 10. Exposures to interest rate risk in the banking book

RBIs association with Basel Committee

RBI

has implemented basel-I accord in all commercial banks in 1993-94.RBI mandated 9% CRAR instead of 8%. In 2003 RBI formed a steering committee to discuss regarding the move from baselI to basel-ii. In march 2007 RBI implemented basel-ii. It has suggested - Standardized approach for credit risk - Basic indicator approach for operational risk

 Standardized

Approach: External credit rating agencies like CARE, Icra will assign the ratings for the assets of the banks and then capital is allocated for each of the assets. Basic Indicator approach: Capital charge should be 15% of banks average annual positive Gross income over the previous three years.