Basel I, II, and III are agreements that established regulatory standards for bank capital adequacy. Basel I, established in 1988, focused on credit risk and set minimum capital requirements of 8% of risk-weighted assets. Basel II, released in 2004, included three pillars: Pillar I established a revised minimum capital framework; Pillar II covered supervisory review; and Pillar III addressed market discipline through disclosure. It recommended a minimum ratio of total capital to risk-weighted assets of 8% and prescribed the minimum capital adequacy ratio of 9% for India. Basel III, finalized in 2017, strengthened bank capital requirements in response to the 2008 financial crisis.

1. Basel Norms I, II & III
HARESH R
ASSISTANT PROFESSOR
DEPARTMENT OF COMMERCE
CHRIST UNIVERSITY

2. Failure of Bretton Woods System
• Bretton Woods System – 1944
– IMF
– World Bank
– System of fixed exchange rates
• In 1973, Bretton Woods System led to
causalities in German Banking System and
UK’s Banking system with huge amount of
foreign exchange exposures which was more
than the capital of the banks.

3. Basel Committee - 1974
• The central bank governors of the G10 countries
established a Committee on Banking Regulations and
Supervisory Practices.
• The group of ten countries consist of Belgium, Canada,
France, Germany, Italy, Japan, the Netherlands,
Sweden, the United Kingdom and the United States,
Switzerland was also included as part of the group.
• Later renamed as the Basel Committee on Banking
Supervision(BCBS).
• The Basel Committee on Banking Supervision provides
a forum for regular cooperation on banking
supervisory matters.
• Its mandate is to strengthen the regulation,
supervision and practices of banks worldwide with
the purpose of enhancing financial stability.

4. • Basel Committee on Banking Supervision
(BCBS) came into being under the patronage
of Bank for International Settlements (BIS),
Basel, Switzerland.
• The Committee formulates guidelines and
provides recommendations on banking
regulation based on capital risk, market risk
and operational risk.

5. • Currently there are 27 member nations in the
committee.
• Basel guidelines refer to broad supervisory standards
formulated by this group of central banks- called the
Basel Committee on Banking Supervision (BCBS).
• The set of agreement by the BCBS, which mainly
focuses on risks to banks and the financial system are
called Basel accord.
• The purpose of the accord is to ensure that financial
institutions have enough capital on account to meet
obligations and absorb unexpected losses. India has
accepted Basel accords for the banking system.

6. • Credit Risk - Credit risk is most simply defined
as the potential that a bank’s borrower or
counterparty may fail to meet its obligations
in accordance with agreed terms.
• Market Risk - Market risk refers to the risk to a
bank resulting from movements in market
prices in particular changes in interest rates,
foreign exchange rates and equity and
commodity prices.

7. BASEL I
• Risk management (Focused on Credit Risk, No
recognition of operational risk)
• Capital adequacy, sound supervision and
regulation
• Transparency of operations
– Unquestionably accepted by developed and
developing countries
– Capital requirement 8% of assets (banks were advised
to maintain capital equal to a minimum 8% of a basket
of assets measured based on the basis of their risk)
• Tier 1 capital at 4%
• Tier 2 capital at 4%

8. Capital Adequacy Framework
• A bank should have sufficient capital to
provide a stable resource to absorb any losses
arising from the risks in its business.
• Capital is divided into tiers according to the
characteristics/qualities of each qualifying
instrument.
• For supervisory purposes capital is split into
two categories: Tier I and Tier II.

9. • Tier I capital -Share capital and disclosed
reserves and it is a bank’s highest quality
capital because it is fully available to cover
losses.
• Tier II capital on the other hand consists of
certain reserves and certain types of
subordinated debt.
• The loss absorption capacity of Tier II capital is
lower than that of Tier I capital.

10. The twin objectives of Basel I were:
(a) to ensure an adequate level of capital in the
international banking system &
(b) to create a more level playing field in the
competitive environment.

11. BASEL II – The New Capital Farmework
• In June 1999, the Committee issued a proposal
for a new capital adequacy framework to replace
the 1988 Accord.
• This led to the release of the Revised Capital
Framework in June 2004. Generally known as
‟Basel II”,
• The New Basel Capital Accord focused on, three
pillars viz.
– Pillar I - Minimum capital requirement
– Pillar II - Supervisory review
– Pillar III - Market discipline

13. Pillar I - Minimum Capital
Requirement
• The Committee on Banking Supervision
recommended the target standard ratio of capital
to Risk Weighted Assets should be at least 8% (of
which the core capital element would be at least
4%).
• The minimum capital adequacy ratio of 8% was
prescribed taking into account the credit risk.
• However, in India the Reserve Bank of India has
prescribed the minimum capital adequacy ratio of
9% of Risk Weighted Assets.

14. Pillar II - Supervisory Review
• The Supervisory review should be carried out
in the following manner.
– Banks should have a process for assessing their
overall capital adequacy
– Supervisors should review banks’ assessments
– Banks are expected to operate above minimum
– Supervisor’s intervention if capital is not sufficient

15. Pillar III: Market Discipline
• Role of the market in evaluating the adequacy
of bank capital
• Streamlined catalogue of disclosure
requirements
• Close coordination with International
Accounting Standards Board
• In principle, disclosure of data on semiannual
basis