Basel I
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A lowdown on the Accord that started it all, Basel I.

A lowdown on the Accord that started it all, Basel I.

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Basel I Basel I Presentation Transcript

  • BASEL PRIMER - BIS & BASEL I Aditya Lathe
  • Bank for InternationalSettlementsBasel I
  • Bank for InternationalSettlements Established: May 1930 at Basel, Switzerland, after World War I. Founding Members: United Kingdom, France, Italy, Japan, Belgium, the United States and Germany. Function: Handling the collection, administration and distribution of annual reparations (~ $8bn over 59 years) from Germany to the Allies. Choice of Switzerland due to its position as an independent, neutral country; offering least exposure to undue influence from any of the major powers.
  • Organization Structure Inter-governmental organization, not accountable to any national government. Limited Liability Company, with share capital held by Central Banks / Monetary Authority of 60 countries.
  • Functions Bank for Central Banks and International Organizations. Forum for discussion and cooperation among central banks and the financial community. Promoting monetary and financial stability. Conducting research on policy issues confronting central banks and financial supervisory authorities.
  • Basel Committee on BankingSupervision (BCBS) Originally established by Central Bank Governors of G-10 nations in 1974. Currently has members from 27 nations (including India). Formulates broad supervisory standards & guidelines, and recommends them to individual authorities. Accordingly, it encourages international convergence towards common supervisory approaches & standards. Committee has no formal supranational supervisory authority & its conclusions do not carry legal force.
  • BCBS Publications 2010 2004 Basel 1988 Basel III II Basel I 1988 - International Convergence of Capital Measurement and Capital Standards. 2004 - Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. 2010 - Basel III: A Global regulatory framework for more resilient banks and banking systems.
  • Bank for InternationalSettlementsBasel I
  • Basel I Consultative document prepared by G-10 nations in 1988. Aimed at i) strengthening the soundness and stability of international banks ii) diminishing competitive inequality among banks Designed to establish minimum levels of capital for internationally active banks. To be applied to banks on a consolidated basis
  • Basel I Focus on Credit Risk and Country Transfer Risk Country Transfer Risk incorporated by grouping countries in terms of riskiness
  • The Framework Capital for Capital RWAs safeguarding against risk Risk Weighting the bank’s loan book for quantifying risk Target Standard Ratio to stipulate minimum level of Capital  required relative to Risk
  • Constituents of Capital Tier I- Core Capital  Equity Capital  Disclosed Reserves Tier II Tier II- Supplementary Capital Supplementa ry Capital  Undisclosed Reserves (50%)  Revaluation Reserves – a) Formal revaluation b) Latent Revaluation (55% Tier I discount) Core Capital  General Provisions (50%)  Hybrid Debt Capital Instruments  Subordinated Term Debt (Limited to 50% of Tier I)
  • Deductions from Capital Goodwill deducted from Tier I Capital Investment in unconsolidated BFSI subsidiaries deducted from Total Capital. Investment in capital of other banks and financial institutions- At the discretion of national authorities.
  • Risk Weighting Direct Credit Exposures: Weighted Risk Weight Ratio used to relate capital to different categories of assets, weighted according to level of riskiness Contingent Exposures:Step I- Application of Credit ConversionFactor (CCF) to account for credit risk ofoff-balance sheet exposure (trade relatedtransactions/guarantees/derivatives)Step II- Weighted Risk Weight Ratio torelate capital to riskiness of exposure
  • Risk Weights (Direct CreditExposure) 0% 20% 50% 100% Claims on Pvt. Cash & Cash Claims on Banks Sector Equivalents inc. in OECD Claims on non- OECD banks, with loans above 1 yearClaims on Central Housing Loans Claims on non- Govt. & Central fully secured by Claims on MDBs OECD central Bank of home residential Govts. country property Premises, Plant & Equipment, other Claims on banks Fixed Assets Direct claims on outside OECD Central OECD, with loans Govts. & Banks All other Assets upto 1 year
  • CCF (Contingent Exposure) 0% 20% 50% 100% Transaction related Direct Credit contingent items Substitutes (eg. (eg. Performance Financial Bank Bank Guarantees) Guarantees) Credit Lines with maturity upto 1 Short-term selfyear, which can be liquidating trade unconditionally credits (eg. LCs) cancelled. Sale & Repurchase Credit Lines with agreements, where maturity above 1 Credit Risk is with year the Bank.
  • CCF (Derivatives) Choice between Current Exposure Method or Original Exposure Method CEM = Total Replacement Cost (MTM value of contracts) + Potential Future Exposure (related to notional principal amount and residual maturity) Residual Interest Rate Exchange Rate Maturity Contracts Contracts < 1 year Nil 1.0% > 1 year 0.5% 5.0%
  • Successes Implementation of the framework by all Basel committee members (except Japan) by 1992. Implementation by all countries (including India) by 1999.
  • Failures Coverage of only Credit Risk Regulatory Capital arbitrage by some banks, resulting in higher riskMethod I - Securitization of corporateloans and sale of least risky assets.Resultant portfolio is morerisky, however requires lesser capitalaccording to Basel IMethod II – Rolling forward short runnon-OECD bank debt instead of long
  • Thank You
  • References BIS Website (www.bis.org) Basel I Accord Basel I, Basel II, and Emerging Markets: A Nontechnical Analysis by Bryan J Balin Wikipedia