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Basel Norms
 

Basel Norms

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  • Quick add:
    RIWAC approach didn't measure liquidity.
    Only CS202 recognized (J158 policy); FRP/RPA neglected.
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    Basel Norms Basel Norms Presentation Transcript

    • Presented By: Finance Department Finhance Pvt Ltd.
    • 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
    • BASEL 1
      • 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
      • Achievement :
        • 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
    • Conclusion
      • 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
      • Thank You…