This presentation provides a basic overview of the Basel agreements. It summarizes the objectives and key aspects of Basel I, which was adopted in 1988, and Basel II, adopted in 2006. Basel I established international standards for capital adequacy and risk management but had shortcomings in risk sensitivity. Basel II aimed to create a more comprehensive framework for credit, market and operational risk and encourage rigorous bank supervision and risk management. The presentation concludes by noting the adoption of Basel II in the EU and flags the subprime crisis as a point for further thinking.

1. Schönen Guten Tag

2. Presentation Topic: Basic Understanding of Basel Agreements Course: Finandamentalsof Financial Management WS 09/10 CourseInstructer: Prof. Dr. Gruner PresenationBy: Mehar Muhammad Ashfaq Date: November 24, 2009 Coburg University of Applied Sciences-Germany

4. Basel I:

5. Overview

6. Short-Comings

7. Achievements

8. ´Basel II:

9. Overview

10. Objectivesof Basel II

11. DifferenceBetween Basel I & Basel II.

13. Overview on Basel Committee Founded in 1974 By Central Bank Governors of G10 (Belgium, Canada, France, Germany, Italy, Japan, Luxemburg, Netherlands, Spain, Sweden, Switzerland, UK, US) Focus: Banking Supervision Objectives: Adequate Supervision No Internationally Active Bank Should EscapeSupervision Meets 4 Times a Year Around 30 Working Groups / Task Forces Location of Secretariat: Basel, Switzerland 5 Mehar Muhammad Ashfaq

14. Basel I – 1988 Agreement 6 Mehar Muhammad Ashfaq

15. Shortcomings of Basel I Capital Required did not Mirror a Bank’s True Risk Profile. Too Simple for Advanced Banks. Inflexible Against New Developments. Covers Only Credit and Market Risks. Only Quantitative in Nature. Limited Recognition of Collateral. 7 Mehar Muhammad Ashfaq

16. Basel I - Achievements Definition of Capital – First to be Internationally Accepted Capital adequacy – First International Benchmark Regulatory Capital Adequacy - Accepted Soundness Indicator Risk Management Orientation Credit Risk: Simple Measure Market Risk: Simple and Advanced Measures Simple to Apply – Contributed to its Acceptance Outcome: Basel I Adopted in over 100 Countries 8 Mehar Muhammad Ashfaq

17. Global Developments & Basel I Globalization Growth in Cross-Border Trade, Finance& Investment. Technological Advances Computing Power and Storage Networks and Communications Financial Engineering (Development of Highly Sophisticated/Complex Products) Above Causes are Reasons for Change……. 9 Mehar Muhammad Ashfaq

18. 2006 …… Basel IIObjectives of Basel II Greater Emphasis on Internal Assessment of Risk. Comprehensive Framework for Credit, Market and Operational Risk. Encourages Rigorous Bank Supervision. Ensures Market Transparency, Disclosures. More Risk sensitive; Better Align Regulatory Capital with Actual Risk Exposure. 10 Mehar Muhammad Ashfaq

19. Overview of Basel II 11 Mehar Muhammad Ashfaq

20. Difference: Basel I Vs Basel II 12 Mehar Muhammad Ashfaq

21. Conclusion Basel II as a law in EU. 1 January 2008 EU & US delayed January 2009. Lenders Sophistication in Risk Management. Tier 2 Capital: 8% of Risk-Weighted Assets. Tier 1 Capital: atleast 4% of Risk-Weighted Assets. Thinking Point……….Sub-prime Financial Crisis. 13 Mehar Muhammad Ashfaq

22. Thanksfor Listening……. For Feedback Mehar Muhammad Ashfaq MBA Financial Management ashfaq8585@hotmail.com Coburg University of Applied Sciences-Germany 14 Mehar Muhammad Ashfaq