Overview of BASEL
Committee founded in 1974.
By Central Bank Governors of G10.
Focus – Banking Supervision.
Objective - Adequate supervision.
Meet 4 Times in a year.
Around 30 working groups/Task Force.
Location at Secretariat : Basel, Switzerland.
Standard Implementation Group
Policy Development Group
Accounting Task Force
Basel Committee Group
What is Tier 1 Capital ?
• Core capital
• Includes (Equity, Perpetual Non-Convertible Preference Shares,
• Maximum 15% usage
• Tier 1 Capital Ratio = Equity capital/RWA
What is Tier 2 Capital?
• Supplementary Capital
• Includes (Undisclosed Reserves, Revaluation Reserves, GP,Hybrid
instruments, unsecured debt.)
• 100% Usage
Basel Accord 1
Introduced in 1988 by BCBS.
Objectives of Basel Accord 1 are as follows:
• To ensure an adequate level of capital in the
international banking system.
• To strengthen the competitive markets, under which
banks could no longer build in adequate business volumes
without adequate capital backing.
According to Basel 1, banks are required to hold capital
equal to 8% of the risk-weighted assets.
Basel Accord 1
Capital = 8% of Risk – Weighted Asset
•Tier 1: Shareholders Equity
and Reserves and Surplus
•Tier 2: Undisclosed
in the baskets of
10%, 20%, 50%, 100%
(on the basis of quality
Basel Accord 1
Drawbacks of Basel Accord 1:
•The measures were seen to be in conflict with
sophisticated internal measures of economic capital
•The bucket approach with a flat 8% charge for claims
on private sector , has led the banks to move high quality
assets off their balance sheet, thus reducing the average
•Unable to recognize credit risk mitigation tech
PILLAR I- Minimum Capital
Capital for Credit Risk
• Standardized approach
Risk weights assigned by borrower’s credit
• Internal Ratings based approach –Foundation
Internal ratings by banks are used.
Capital for Operational Risk
• Basic Indicator Approach
Fixed percentage of the average of gross income
for 3 years
• Standardized Approach
Risk measured based on division of Bank’s
business into 8 lines and respective exposure
• Advanced Measurement Approach
Risk measure generated by internal operational
risk measurement system
Capital for Market Risk
Value At Risk measure is calculated on the
bank’s current portfolio to measure the impact
of the current market factors on the portfolio.
Based on historical data for past 12 months
Capital to Risk Weighted Asset Ratio
CRAR = (TIER 1 Capital + TIER 2 Capital) /
(Credit RWA + Market RWA + Operational
*RWA- Risk Weighted Assets
As per RBI, banks in India must maintain a
CRAR of 9%
SUPERVISORY REVIEW PROCESS
• It is a regulatory response to the first pillar.
• Ensures maintenance of minimum capital by
• Monitors and guides banks on risk
management of its assets.
Functions of supervisor
Ensuring banks have a process to assess
minimum capital requirements.
Reviewing these assessments.
Ensure banks maintain capital above the
Prevent capital from falling below the
Capital adequacy ratios
Pillar 3 : Market Discipline
Monitor risk-taking behavior of banks