Basel Norms


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Basel Norms

  1. 1. Presented By: Finance Department Finhance Pvt Ltd.
  2. 2. About the BIS <ul><li>Established on 17 May 1930 </li></ul><ul><li>The BIS is the world’s oldest international financial organization </li></ul><ul><li>Head office is in Basel, Switzerland and representative offices in Hong Kong SAR and in Mexico City. </li></ul><ul><li>The BIS currently employs around 550 staff from 50 countries. </li></ul>
  3. 3. List of Member Central Banks
  4. 4. Basel committee on Banking Supervision – (BCBS) <ul><li>A set of agreements </li></ul><ul><li>Regulations and recommendations on Credit risk , market risk and operational risk </li></ul><ul><li>Purpose – to have enough capital on account to meet obligations and absorb unexpected losses </li></ul>
  5. 5. BASEL 1 <ul><li>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. </li></ul><ul><li>Primary focus on credit risk </li></ul><ul><li>Assets of banks were classified and grouped in five categories to credit risk weights of zero ‘0’, 10, 20, 50 and up to 100%. </li></ul><ul><li>Assets like cash and coins usually have zero risk weight, while unsecured loans might have a risk weight of 100%. </li></ul>
  6. 6. Capital Adequacy Ratio (CAR) <ul><li>Expressed as a percentage of a bank's risk weighted credit exposures. </li></ul><ul><li>Also known as &quot;Capital to Risk Weighted Assets Ratio (CRAR). </li></ul><ul><li>Ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. </li></ul>
  7. 8. Purpose of Basel 1 <ul><li>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 </li></ul><ul><li>Achievement : </li></ul><ul><ul><li>to set up a minimum risk-based capital adequacy applying to all banks and governments in the world </li></ul></ul>
  8. 9. Basel Norms & Indian Banking System <ul><li>Basel Accord I. was established in 1988 and was implemented by 1992 in India. </li></ul><ul><li>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. </li></ul><ul><li>RBI norms on capital adequacy at 9% are more stringent than Basel Committee stipulation of 8%. </li></ul><ul><li>Commercial Banks , Cooperative Banks and Reginal rural banks banks have different RBI guidelines </li></ul>
  9. 10. Pitfalls of Basel I <ul><li>Limited differentiation of credit risk (0%, 20%, 50% and 100%) </li></ul><ul><li>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 . </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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 </li></ul>
  10. 11. Conclusion <ul><li>Basel 1- Milestone in Finance and Banking History </li></ul><ul><li>It launched the trend toward increasing risk modeling research </li></ul><ul><li>However, its over-simplified calculations, and classifications have simultaneously called for its disappearance, paving the way for the Basel II Capital Accord </li></ul><ul><li>It led to further agreements as the symbol of the continuous refinement of risk and capital </li></ul>
  11. 12. <ul><li>Thank You… </li></ul>