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Basel iii


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Basel iii

  1. 1. An Overview Of the BASEL iii Presented by: Rana Faisal Ali Wajahat Hussain Muneeb Rana Azhar Sadiq
  2. 2. Introduction: • Basel is a city in Switzerland which is also the headquarters of Bureau of International Settlement (BIS). • BIS’s common goal:  financial stability  common standards • BIS have 27 member nations in the committee.
  3. 3. Basel – I Norms In 1988, the Basel I Capital Accord was created. The general purpose was to: 1. Strengthen the stability of international banking system. 2. Set up a fair and a consistent international banking system in order to decrease competitive inequality among international banks.
  4. 4. Limitations of Basel – I Norms • Limited differentiation of credit risk • Static measure of default risk • No recognition of term-structure of credit risk • Simplified calculation of potential future counter party risk • Lack of recognition of portfolio diversification effects
  5. 5. Basel – II Norms Basel – II norms are based on 3 pillars: • Minimum Capital – Banks must hold capital against 8% of their assets, after adjusting their assets for risk • Supervisory Review – It is the process whereby national regulators ensure their home country banks are following the rules. • Market Discipline – It is based on enhanced disclosure of risk
  6. 6. Pitfalls of Basel – II norms • Too much regulatory compliance • Over Focusing on Credit Risk • The new Accord is complex and therefore demanding for supervisors, and unsophisticated banks • Strong risk differentiation in the new Accord can adversely affect the borrowing position of risky borrowers
  7. 7. Advantages of Basel II over I • The discrepancy between economic capital and regulatory capital is reduced significantly, due to that the regulatory requirements will rely on banks’ own risk methods. • More Risk sensitive • Wider recognition of credit risk mitigation.
  8. 8. Basel – III Norms Basel – III norms aim to: • Improving the banking sector's ability to absorb shocks arising from financial and economic stress • Improve risk management and governance • Strengthen banks' transparency and disclosures
  9. 9. Structure of Basel – III Accord • Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) : Maintaining capital calculated through credit, market and operational risk areas. • Supervisory Review Process : Regulating tools and frameworks for dealing with peripheral risks that banks face • Market Discipline : Increasing the disclosures that banks must provide to increase the transparency of banks
  10. 10. Major changes in Basel - III • Better Capital Quality • Capital Conservation Buffer • Counter cyclical Buffer • Minimum Common Equity and Tier I Capital requirements • Leverage Ratios • Liquidity Ratios • Systematically Important Financial Institutions
  11. 11. BASEL III ACCORD • The G20 endorsed the new ‘Basel 3’ capital and liquidity requirements. • Extension of Basel II with critical additions, such as a leverage ratio, a macro prudential overview and the liquidity framework. • Basel III accord provides a substantial strengthening of capital requirements. • Basel III will place greater emphasis on loss-absorbency capacity on a going concern basis • The proposed changes are to be phased from 2013 to 2015
  12. 12. Basel III-Objectives • Special emphasis on the Capital Adequacy Ratio – Capital Adequacy Ratio is calculated as – CAR = (Tier 1 Capital + Tier 2 Capital) / Risk Weighted Assets – Reducing risk spillover to the real economy • Comprehensive set of reform measures to strengthen the banking sector. • Strengthens banks transparency and disclosures. • Improve the banking sectors ability to absorb shocks arising from financial and economic stress.
  13. 13. Major features of Basel III • Revised Minimum Equity & Tier 1 Capital Requirements • Better Capital Quality • Backstop Leverage Ratio • Short term and long term liquidity funding • Inclusion of Leverage Ratio & Liquidity Ratios • Rigorous credit risk management • Counter Cyclical Buffer • Capital conservation Buffer
  14. 14. Impact on Pakistani banking system • Profitability • Capital acquisition • Liquidity Needs • Limits on lending • Bank consolidation • Pressure on Yield on Assets • Pressure on Return on Equity: • Stability in the Banking system
  15. 15. Conclusion • One shoe doesn’t fit all. • Monetary policies of Central Banks in each country (example RBI’s CRR, SLR, Repo etc.) make it difficult to uniformly implement BASEL norms • Exercising controls on the capital, liquidity and leveraging of banks will ensure that they have the ability to withstand crises.