Your SlideShare is downloading. ×
26882112 basel-ii-concept-implication-100304061425-phpapp01
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Introducing the official SlideShare app

Stunning, full-screen experience for iPhone and Android

Text the download link to your phone

Standard text messaging rates apply

26882112 basel-ii-concept-implication-100304061425-phpapp01

529
views

Published on

Published in: Economy & Finance, Business

0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
529
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
34
Comments
0
Likes
1
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. BASEL IIBASEL II Concept &Concept & ImplicationImplication
  • 2. ConceptConcept Overview:Overview:  Basel HistoryBasel History  About Basel IAbout Basel I  About Basel IIAbout Basel II  IntroductionIntroduction  DefinitionDefinition  Three Pillar ApproachThree Pillar Approach  Advantages & DrawbacksAdvantages & Drawbacks  Implementation progressImplementation progress  Basel I Vs Basel IIBasel I Vs Basel II  Challenges with Indian banking industry.Challenges with Indian banking industry.  Implication.Implication.
  • 3. Basel History…  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 worldwide.  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 supervision.
  • 4. Basel I 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 for banks. 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.
  • 5. Basel II  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 discipline.
  • 6. The Accord in operation The 3 Pillar Approach Minimum Capital Requirements Supervisory Review Market Discipline & Disclosure
  • 7. 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.
  • 8. 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 system.
  • 9. 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 appropriately.
  • 10. Advantages..  Takes global aspect into consideration for more rational decision making, improving the decision matrix for banks.  Makes better business standards.  Reduces losses to the banks.  Improving overall efficiency of banking and finance systems.  Allowing capital allocation based on ratings of the borrower making capital more risk-sensitive.  Provides range of alternatives to choose from.  Incorporates sensitivity to banks.  Encouraging mergers and acquisitions and more collaboration on the part of the banks, this ultimately leads to proper control over their capital and assets.
  • 11. Drawbacks…Drawbacks…  Dealing with diversity.Dealing with diversity.  Lack of data on internal ratings andLack of data on internal ratings and modeling.modeling.  Credit risk reduction.Credit risk reduction.  Cyclical fluctuations in bank lending.Cyclical fluctuations in bank lending.  Competition among banks.Competition among banks.  Financial innovations.Financial innovations.
  • 12. 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.
  • 13. Challenges with Indian Banking Industry..  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, since most of the banks have poor asset quality leading to significant proportion of NPA. This also may lead to Mergers & Acquisitions, which itself would be loss of capital to entire system.  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 diversified portfolios.
  • 14. Conti… Challenges with Indian Banking Industry..  Implementation of the Basel II will require huge investments in technology. According to estimates, Indian banks, especially those with a sizeable branch network, will need to spend well over $ 50-70 Million on this.  Experts say that dearth of risk management expertise in the Asia Pacific region will serve as a hindrance in laying down guidelines for a basic framework for the new capital accord.  The technology infrastructure in terms of computerization is still in a nascent stage in most Indian banks. Computerization of branches, especially for those banks, which have their network spread out in far-flung areas, will be a daunting task.
  • 15. Implications..Implications..  The Basel Committee on Banking Supervision is a Guideline forThe Basel Committee on Banking Supervision is a Guideline for Computing Capital for Incremental Risk.Computing Capital for Incremental Risk.  It is a new way of managing risk and asset-liability mismatches,It is a new way of managing risk and asset-liability mismatches, like asset securitization, which unlocks resources and spreads risk,like asset securitization, which unlocks resources and spreads risk, are likely to be increasingly used.are likely to be increasingly used.  The major challenge the country's financial system faces today isThe major challenge the country's financial system faces today is to bring informal loans into the formal financial system.to bring informal loans into the formal financial system. ByBy implementing Basel II norms, our formal banking system can learnimplementing Basel II norms, our formal banking system can learn many lessons from money-lenders.many lessons from money-lenders.  This was designed for the big banks in the BCBS memberThis was designed for the big banks in the BCBS member countries, not for smaller or less developed economies.countries, not for smaller or less developed economies.
  • 16. Implications..Implications..  Keeping in view the cost of compliance for both banks andKeeping in view the cost of compliance for both banks and supervisors, the regulatory challenge would be to migrate tosupervisors, the regulatory challenge would be to migrate to Basel II in a non-disruptive manner.Basel II in a non-disruptive manner.  India is one of the early countries which subjected itselfIndia is one of the early countries which subjected itself voluntarily to the FSAP of the IMF, and our system wasvoluntarily to the FSAP of the IMF, and our system was assessed to be in high compliance with the relevant principles.assessed to be in high compliance with the relevant principles.  With the gradual and purposeful implementation of theWith the gradual and purposeful implementation of the banking sector reforms over the past decade, the Indianbanking sector reforms over the past decade, the Indian banking system has shown significant improvement onbanking system has shown significant improvement on various parameters, has become robust and displayed amplevarious parameters, has become robust and displayed ample resilience to shocks in the economy.resilience to shocks in the economy.  There is, therefore, ample evidence of the capacity of the IndianThere is, therefore, ample evidence of the capacity of the Indian banking system to migrate smoothly to Basel II.banking system to migrate smoothly to Basel II.
  • 17. Thank youThank you