Basel norms were introduced by Basel Committee to have a standardized prudential norms for capital adequacy
The prudential norms defined components of capital, assigned risk weights to different types of assets and stipulated the minimum Capital Adequacy to aggregate Risk weighted Assets (CRAR)
The minimum standard of capital to be kept with commercial banks was fixed 8% of RWA under Basel 1 & Basel 2 norms which was increased to 9% of RWA under Basel 3
Capital Adequacy Ratio-
Capital adequacy ratio is the ratio of the banks capital to its risk-weighted assets
The capital adequacy of banks is assessed based on the following three aspect –
Composition of capital
Composition of risk-weighted assets
Assigning risk-weights
Basel 1
Came into effect in the year 1988
Focused majorly on credit risk
Minimum capital requirement was set 8% to be achieved by the end of 1992 and it applied to all G10 countries
However later on several non-G10 countries also adopted the same
Objectives of Basel 1 accord were : To strengthen the soundness and stability of banking system and to have high degree of consistency across the banks
Basel 2
Came into effect in the year 2006
Focused on all sort of credit risk, market risk and operational risk
Minimum capital requirement set remained same as in Basel 1 at 8%
Provided for better risk management practices and advised bank on using internal systems for assessment of risks
Supervisors were advised to take suitable approaches for efficiency of bank
Basel 3
Banks are required to maintain a minimum of Pillar 1 Capital to Risk weighted Assets Ratio of 9% on a continuous basis.
For assessment of capital charge for credit risk banks have to mandatory obtain credit rating from credit rating agencies approved by RBI.
NPA management procedures implemented through classification of loan assets as standard, sub-standard, doubtful and loss assets.
Thank You For Watching
Subscribe to DevTech Finance
2. INTRODUCTION
• Basel norms were introduced by Basel Committee to have a standardized
prudential norms for capital adequacy
• The prudential norms defined components of capital, assigned risk
weights to different types of assets and stipulated the minimum Capital
Adequacy to aggregate Risk weighted Assets (CRAR)
• The minimum standard of capital to be kept with commercial banks was
fixed 8% of RWA under Basel 1 & Basel 2 norms which was increased to
9% of RWA under Basel 3
4. CAPITAL ADEQUACY RATIO
• Capital adequacy ratio is the ratio of the banks capital to its risk-
weighted assets
• The capital adequacy of banks is assessed based on the following
three aspects –
a) Composition of capital
b) Composition of risk-weighted assets
c) Assigning risk-weights
5. CAR CALCULATION
Capital Adequacy Ratio = ( Tier 1 capital + Tier 2 capital )
Risk weighted asset
TIER 1 CAPITAL
• Shareholder’s Equity
• Disclosed Reserve
• Preferential Capital
• Retained Earning
TIER 2 CAPITAL
• Debt
• Undisclosed Reserve
• Loss Reserve
• Revaluation Reserve
6. BASEL 1
• Came into effect in the year 1988
• Focused majorly on credit risk
• Minimum capital requirement was set 8% to be achieved by the end of 1992
and it applied to all G10 countries
• However later on several non-G10 countries also adopted the same
• Objectives of Basel 1 accord were : To strengthen the soundness and stability
of banking system and to have high degree of consistency across the banks
7. BASEL 2
• Came into effect in the year 2006
• Focused on all sort of credit risk, market risk and operational risk
• Minimum capital requirement set remained same as in Basel 1 at 8%
• Provided for better risk management practices and advised bank on using
internal systems for assessment of risks
• Supervisors were advised to take suitable approaches for efficiency of bank
8. THREE PILLARS INTRODUCED IN BASEL 2
Minimum
Capital
Requirement
Market
Discipline
Supervisory
Review
9. BASEL 3
• Banks are required to maintain a minimum of Pillar 1 Capital to Risk weighted
Assets Ratio of 9% on a continuous basis.
• For assessment of capital charge for credit risk banks have to mandatory
obtain credit rating from credit rating agencies approved by RBI.
• NPA management procedures implemented through classification of loan
assets as standard, sub-standard, doubtful and loss assets.