This research paper work was presented in National Level Management Conference Presentation on Brindavan College . The paper and presentation both appreciated as best research and presentation by jury panel headed by seasoned Banking Executives

1. BASEL III : NEW PARADIGM OF RISK
MANAGEMENT IN BANKING SECTOR
Purushottam Kumar Karna
MBA-VTU-3rd sem
National level Management Conference
Brindavan College Bangalore

2. BANKING CRISIS 2008

3. INDEX
BASEL III: Introduction
Evolution of BASEL Accord
Basel III : Architecture & Key Components
Timeline proposed for Implementation of BASEL III
Basel III : Impact on Indian Economy
Basel III impact on Public Sector Banks
Basel III impact on Private Banks
Basel III impact on Foreign Banks

4. EVOLUTION OF BASEL ACCORDS
1 Tighter capital definition
2 Capital buffers
Capital Ratios
and Targets 3 Leverage ratio
4 Higher minimum ratios
5 Systemic add-on
Pillar-3 Disclosure
Pillar-2 ICAAP 6 Counterparty risk
RWA
Requirements Pillar-1 Operational risk Incremental risk
Pillar-1 Market risk 7 Trading book revisions
Pillar-1 Credit risk New Pillar-1 Credit risk Securitization revision
8 Coverage ratio
Liquidity 9 Net stable funding ratio
Standards
Tier 1 and 2 definition
Basel I Basel II Basel II.5 Basel III

5. KEY BASEL III COMPONENTS
Areas Main Basel III components
 Capital ratios and targets
Capital definition
Countercyclical buffers
Leverage ratio
Minimum capital standards
Systemic risk
 RWA requirements
Counterparty risk
Trading book
 Liquidity standards
Liquidity coverage ratio
Net stable funding ratio

6. BASEL III ARCHITECTURE

7. TIMELINE PROPOSED FOR IMPLEMENTATION OF
BASEL III

8. BASEL III : IMPACT ON INDIAN ECONOMY
 Existing capital ratios of most of Indian banks are
above the prescribed norms
 Unlikely to be significantly impacted by proposed
norms
 Systemic important Financial Institution
 Leverage in the Indian banking system is quite
moderate
 Possibly some negative impact from
 the shifting of deductions from regulatory
capital to common equity
 large OTC bilateral derivatives positions

9. BASEL III IMPACT ON PUBLIC SECTOR BANKS
 Initially there will be INR 326 billion deficit under total capital needed by PSU where 469 surplus in
common equity capital
 Most of the capital deficit in initial year is expected to be maintained through tier II bond.
 In 2017, common equity capital deficit will be reach up to 1718 billion and total capital deficit 2892
billion.
 By 2019, Indian banking system will require additional capital of 3824 billion for which 70% of total
capital 2385 billion will be common equity i.e. share capital plus reserve excluding share premium.

10. BASEL III IMPACT ON PRIVATE BANKS
Source: E&Y
Implication:
 Private Banks have sufficient surplus total capital base over the
implementation period due to higher additional tier I & tier II capital.
 However even private bank will require common equity after 2015.
 The total shortfall for equity capital will reach 540 billion on 2019.

11. BASEL III IMPACT ON FOREIGN BANKS
Resource:E&Y
Implication:
 Foreign banks have surplus common equity but are expected to fall short of total capital after
2014 by 24 billion.
 Foreign banks not tapping local bond market is expected to impact their RoE relative other banks
 Access to corporate bond markets is expected to augment capital base of foreign banks in the
near term.
 Increased retained earnings also can fulfill the future need of common equity section of capital

12. CHALLENGES OF BASEL III
 Each percentage point increase in capital ratios will
reduce economic output by only 0.2% in any one
year of total GDP output.
 The existence of shadow banking and complex
OTC derivative, securitized products and off
balance sheet exposure of toxic assets yet to be
managed properly.
 Accounting Standard IFRS 9 – still evolving
 Modification of IT systems
 Up gradation of staff skills – capacity building

13. CONCLUSION : CONCERNS
 Regulator authority RBI must devise policy for holistic
macro prudential management which addresses SIFI &
capital adjustments.
 Different type of banks like PSU, Private and Foreign
banks have their own types of capital deficit need so
different types strategy will need to be adopted for capital
acquisition.
 Forward looking provisions like contra cyclical
provisions, capital conservation buffers will make Banking
system more resilient.
 Liquidity management facility will absorb liquidity risk
triggered recent banking crisis of US .

14. THANK YOU
Q&A