The document provides information on the Bank for International Settlements (BIS) and the Basel I accord. It discusses that BIS was established in 1930 by central banks and continues to serve as a forum for international cooperation on banking supervision. Basel I, released in 1988, was the first international banking accord that set minimum capital requirements for credit risk. It established risk weights for various types of assets and exposures. However, it only addressed credit risk and was later improved by Basel II and III.

1. BASEL PRIMER - BIS & BASEL I
Aditya Lathe

2. Bank for International
Settlements
Basel I

3. Bank for International
Settlements
 Established: May 1930 at
Basel, Switzerland, after World War I.
 Founding Members: United
Kingdom, France, Italy, Japan, Belgium, the
United States and Germany.
 Function: Handling the
collection, administration and distribution of
annual reparations (~ $8bn over 59 years)
from Germany to the Allies.
 Choice of Switzerland due to its position as
an independent, neutral country; offering
least exposure to undue influence from any of
the major powers.

4. Organization Structure
 Inter-governmental organization, not accountable
to any national government.
 Limited Liability Company, with share capital held
by Central Banks / Monetary Authority of 60
countries.

5. Functions
 Bank for Central Banks and
International Organizations.
 Forum for discussion and cooperation
among central banks and the financial
community.
 Promoting monetary and financial
stability.
 Conducting research on policy issues
confronting central banks and financial
supervisory authorities.

6. Basel Committee on Banking
Supervision (BCBS)
 Originally established by Central Bank
Governors of G-10 nations in 1974.
 Currently has members from 27 nations
(including India).
 Formulates broad supervisory standards &
guidelines, and recommends them to
individual authorities. Accordingly, it
encourages international convergence
towards common supervisory approaches &
standards.
 Committee has no formal supranational
supervisory authority & its conclusions do not
carry legal force.

8. BCBS Publications
2010
2004 Basel
1988 Basel III
II
Basel I
 1988 - International Convergence of Capital
Measurement and Capital Standards.
 2004 - Basel II: International Convergence of
Capital Measurement and Capital Standards: A
Revised Framework.
 2010 - Basel III: A Global regulatory
framework for more resilient banks and
banking systems.

9. Bank for International
Settlements
Basel I

10. Basel I
 Consultative document prepared by
G-10 nations in 1988.
 Aimed at i) strengthening the
soundness and stability of
international banks ii) diminishing
competitive inequality among banks
 Designed to establish minimum levels
of capital for internationally active
banks.
 To be applied to banks on a
consolidated basis

11. Basel I
 Focus on Credit Risk and Country
Transfer Risk
 Country Transfer Risk incorporated by
grouping countries in terms of
riskiness

12. The Framework
 Capital for
Capital RWAs
safeguarding against
risk
 Risk Weighting the
bank’s loan book for
quantifying risk
 Target Standard Ratio
to stipulate minimum
level of Capital
 required relative to
Risk

13. Constituents of Capital
Tier I- Core Capital
 Equity Capital
 Disclosed Reserves
Tier II Tier II- Supplementary Capital
Supplementa
ry Capital  Undisclosed Reserves
(50%)
 Revaluation Reserves –
a) Formal revaluation
b) Latent Revaluation (55%
Tier I discount)
Core Capital
 General Provisions
(50%)
 Hybrid Debt Capital Instruments
 Subordinated Term Debt (Limited
to 50% of Tier I)

14. Deductions from Capital
 Goodwill deducted from Tier I Capital
 Investment in unconsolidated BFSI
subsidiaries deducted from Total
Capital.
 Investment in capital of other banks
and financial institutions- At the
discretion of national authorities.

15. Risk Weighting
 Direct Credit Exposures: Weighted Risk
Weight Ratio used to relate capital to
different categories of assets, weighted
according to level of riskiness
 Contingent Exposures:
Step I- Application of Credit Conversion
Factor (CCF) to account for credit risk of
off-balance sheet exposure (trade related
transactions/guarantees/derivatives)
Step II- Weighted Risk Weight Ratio to
relate capital to riskiness of exposure

16. Risk Weights (Direct Credit
Exposure)
0% 20% 50% 100%
Claims on Pvt.
Cash & Cash Claims on Banks Sector
Equivalents inc. in OECD
Claims on non-
OECD banks, with
loans above 1 year
Claims on Central Housing Loans
Claims on non-
Govt. & Central fully secured by
Claims on MDBs OECD central
Bank of home residential
Govts.
country property
Premises, Plant &
Equipment, other
Claims on banks Fixed Assets
Direct claims on
outside
OECD Central
OECD, with loans
Govts. & Banks All other Assets
upto 1 year

17. CCF (Contingent Exposure)
0% 20% 50% 100%
Transaction related Direct Credit
contingent items Substitutes (eg.
(eg. Performance Financial Bank
Bank Guarantees) Guarantees)
Credit Lines with
maturity upto 1 Short-term self
year, which can be liquidating trade
unconditionally credits (eg. LCs)
cancelled.
Sale & Repurchase
Credit Lines with
agreements, where
maturity above 1
Credit Risk is with
year
the Bank.

18. CCF (Derivatives)
 Choice between Current Exposure
Method or Original Exposure Method
 CEM = Total Replacement Cost (MTM
value of contracts) + Potential Future
Exposure (related to notional principal
amount and residual maturity)
Residual Interest Rate Exchange Rate
Maturity Contracts Contracts
< 1 year Nil 1.0%
> 1 year 0.5% 5.0%

19. Successes
 Implementation of the framework by
all Basel committee members (except
Japan) by 1992.
 Implementation by all countries
(including India) by 1999.

20. Failures
 Coverage of only Credit Risk
 Regulatory Capital arbitrage by some
banks, resulting in higher risk
Method I - Securitization of corporate
loans and sale of least risky assets.
Resultant portfolio is more
risky, however requires lesser capital
according to Basel I
Method II – Rolling forward short run
non-OECD bank debt instead of long

21. Thank You

22. References
 BIS Website (www.bis.org)
 Basel I Accord
 Basel I, Basel II, and Emerging
Markets: A Nontechnical Analysis by
Bryan J Balin
 Wikipedia