Basel Committee was constituted by the Central Bank
Governors of the G-10 countries.
The Committee's Secretariat is located at the Bank for
International Settlements in Basel, Switzerland.
Its objective is to enhance understanding of key supervisory
issues and quality improvement of banking supervision
This committee is best known for its international standards
on capital adequacy; the core principles of banking
supervision and the concordat on cross-border banking
HISTORY OF BASEL COMMITTIEES
Basel I: the Basel Capital Accord, introduced in 1988 and focuses on
Capital adequacy of financial institutions.
Basel II: the New Capital Framework, issued in 2004, focuses on following
three main pillars
Minimum capital Standard [Minimum CAR ]
Supervisory review and
[Review by central Bank RBI, on time to time]
[Review by market, stake holders, customer, share holder, gvt etc]
Basel III: Basel III released in December, 2010, (implementation till March 31, 2018)"Basel
III" is a comprehensive set of reform measures in,
risk management of the banking sector.
Basel I is the round of deliberations by central
bankers from around the world, and in 1988, the
Basel committee (BCBS) in Basel, Switzerland,
published a set of minimal capital requirements
It primarily focused on credit risk .
Basel I is now widely viewed as outmoded, and
a more comprehensive set of guidelines, known
as Basel II are in the process of implementation
by several countries.
Basel II is a type of recommendations on banking
laws and regulations issued by the Basel
Committee on Banking Supervision that was
initially published in June 2004.
The objective of Basel II is to create an
international standard that banking regulators
can use when creating regulations about how
much capital banks need to put aside to guard
against the types of financial and operational
risks banks face.
Basel II includes recommendations on three main
areas: risks, supervisory review, and market
The Accord in operation
The 3 Pillar Approach
Minimum Capital Requirements
Market Discipline & Disclosure
The First Pillar..
The first pillar deals with maintenance of
regulatory capital calculated for three major
components of risk that a bank faces: credit risk,
operational risk and market risk. Other risks are
not considered fully quantifiable at this stage.
The Second Pillar..
The second pillar deals with the regulatory
response to the first pillar, giving regulators
much improved 'tools' over those available to
them under Basel I.
It also provides a framework for dealing with
all the other risks a bank may face, such as
systemic risk, pension risk, concentration risk,
strategic risk, reputation risk, liquidity risk
and legal risk, which the accord combines
under the title of residual risk. It gives bank a
power to review their risk management
The Third Pillar..
The third pillar greatly increases the disclosures
that the bank must make. This is designed to
allow the market to have a better picture of the
overall risk position of the bank and to allow the
counterparties of the bank to price and deal
Basel I VS Basel II
Basel I is very simplistic in its approach
towards credit risks. It does not distinguish
between collateralized and non-collateralized
loans, while Basel II tries to ensure that the
anomalies existed in Basel I are corrected.
WHY BASEL-III ?
Because of the global financial crisis which begin 2008 because of,
Excess credit growth.
Failures of Basel II being
Inability to strengthen financial stability
Insufficient capital reserve
Global financial crisis in spite of Basel I & Basel II
Responding to these risk factors, the Basel Committee did following major reforms in
Increase the quality and quantity capital
Introduce Leverage ratio
Improve liquidity rules
OBJECTIVES OF BASEL-III
To improve quality of capital
To improve liquidity of assets
To bring further transparency and market discipline under Pillar III.
To improve the banking sector's ability to deal with financial and economic stress,
To Improving banking sector’s ability to absorb shocks (by creating capital buffer)
To optimizing the leverage through Leverage Ratio
To reduce risk spillover to the real economy
Three pillars of BASEL-II still standing
Pillar-1: Capital Requirement:
Minimum capital required based on Risk Weighted Assets (RWAs).
Pillar-2: Supervisory Review:
Whether Bank is maintaining proper capital or not, that aspect will be
reviewed time to time by central bank (RBI) in India
Pillar-3: Market Discipline:
Pillar 3 is designed to increase the transparency in banking system
The Impact of Basel III
Impact on economy:
(IIF) calculated that the economies of G3 (US, Euro Area and Japan) would be 3% smaller
after implementation of Basel-III till 2015.
Basel Committee study:
0.2% Impact on GDP each year for 4 years
Global banks could have a gap of liquid assets of € 1,730 billion in four years
Global big banks could have a capital shortfall of € 577 billion to meet 7% common equity
However, long term gains will be immense
Challenges with Indian Banking
With the feature of additional capital requirements, the overall
capital level of the banks will see an increase. But, the
banks that will not be able to make it as per the norms may be left
out of the global system.
Another biggest challenge is re-structuring the assets of some
of the banks would be a tedious process.
The new norms seem to favor the large banks that have
better risk management and measurement expertise, who
also have better capital adequacy ratios and geographically
The Basel Committee on Banking Supervision is a Guideline for
Computing Capital for Incremental Risk.
It is a new way of managing risk and asset-liability mismatches,
like asset securitization, which unlocks resources and spreads risk,
are likely to be increasingly used.
The major challenge the country's financial system faces today is to
bring informal loans into the formal financial system. By
implementing Basel II norms, our formal banking system can learn
many lessons from money-lenders.
Imposing economic loss and emotional pain on hundreds of millions and
billions of people because of the crisis which arise due to improper
regulation, deregulation, and lake of supervision,
It is worthwhile to give up a little economic growth in the average year in
order to avoid these major impacts,