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About the BIS
Established on 17 May 1930
The BIS is the world’s oldest international financial organization
Head office is in Basel, Switzerland and representative offices in Hong Kong SAR and in Mexico City.
The BIS currently employs around 550 staff from 50 countries.
List of Member Central Banks
Basel committee on Banking Supervision – (BCBS)
A set of agreements
Regulations and recommendations on Credit risk , market risk and operational risk
Purpose – to have enough capital on account to meet obligations and absorb unexpected losses
In 1988, the Basel Committee(BCBS) in Basel, Switzerland, published a set of minimal capital requirements for banks, known as 1988 BaselAccord or Basel 1.
Primary focus on credit risk
Assets of banks were classified and grouped in five categories to credit risk weights of zero ‘0’, 10, 20, 50 and up to 100%.
Assets like cash and coins usually have zero risk weight, while unsecured loans might have a risk weight of 100%.
Capital Adequacy Ratio (CAR)
Expressed as a percentage of a bank's risk weighted credit exposures.
Also known as "Capital to Risk Weighted Assets Ratio (CRAR).
Ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.
Purpose of Basel 1
1. Strengthen the stability of international banking system. 2. Set up a fair and a consistent international banking system in order to decrease competitive inequality among international banks
to set up a minimum risk-based capital adequacy applying to all banks and governments in the world
Basel Norms & Indian Banking System
Basel Accord I. was established in 1988 and was implemented by 1992 in India.
over 3 years – banks with branches abroad were required to comply fully by end March 1994 and the other banks were required to comply by end March 1996.
RBI norms on capital adequacy at 9% are more stringent than Basel Committee stipulation of 8%.
Commercial Banks , Cooperative Banks and Reginal rural banks banks have different RBI guidelines
Pitfalls of Basel I
Limited differentiation of credit risk (0%, 20%, 50% and 100%)
Static measure of default risk The assumption that a minimum 8% capital ratio is sufficient to protect banks from failure does not take into account the changing nature of default risk .
No recognition of term-structure of credit risk The capital charges are set at the same level regardless of the maturity of a credit exposure.
Simplified calculation of potential future counterparty risk The current capital requirements ignore the different level of risks associated with different currencies and macroeconomic risk. In other words, it assumes a common market to all actors, which is not true in reality.
Lack of recognition of portfolio diversification effects In reality, the sum of individual risk exposures is not the same as the risk reduction through portfolio diversification . Therefore, summing all risks might provide incorrect judgment of risk
Basel 1- Milestone in Finance and Banking History
It launched the trend toward increasing risk modeling research
However, its over-simplified calculations, and classifications have simultaneously called for its disappearance, paving the way for the Basel II Capital Accord
It led to further agreements as the symbol of the continuous refinement of risk and capital