This presentation is the one stop point to learn about Basel Norms in the Banking
This is the most comprehensive presentation on Risk Management in Banks and Basel Norms. It presents in details the evolution of Basel Norms right form Pre Basel area till implementation of Basel III in 2019 along with factors and reason for shifting of Basel I to II and finally to III.
Links to Video's in the presentation
Risk Management in Banks
https://www.youtube.com/watch?v=fZ5_V4RW5pE
Tier 1 Capital
http://www.investopedia.com/terms/t/tier1capital.asp
Tier 2 Capital
http://www.investopedia.com/terms/t/tier2capital.asp
Basel I
http://www.investopedia.com/terms/b/basel_i.asp
Capital Adequacy Ratio
http://www.investopedia.com/terms/c/capitaladequacyratio.asp
Basel II
http://www.investopedia.com/video/play/what-basel-ii/?header_alt=c
Basel III
http://www.investopedia.com/terms/b/basell-iii.asp
RBI Governor - Raghuram G Rajan on the importance if Basel III regulations
https://youtu.be/EN27ZRe_28A
A set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets.
A set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets.
Asset Liability Management and Risk Management over laps each other on many grounds, they are the two very important concepts of the study of Financial Systems.
Asset liability management (ALM) can be defined as the comprehensive and dynamic framework for measuring, monitoring and managing the financial risks associated with changing interest rates, foreign exchange rates and other factors that can affect the organisation’s liquidity.
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Asset Liability Management and Risk Management over laps each other on many grounds, they are the two very important concepts of the study of Financial Systems.
Asset liability management (ALM) can be defined as the comprehensive and dynamic framework for measuring, monitoring and managing the financial risks associated with changing interest rates, foreign exchange rates and other factors that can affect the organisation’s liquidity.
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Basel Accords - Basel I, II, and III Advantages, limitations and contrastSyed Ashraf Ali
The Basel Accords is referred to the banking supervision Accords (recommendations on banking regulations). Basel I, Basel II and Basel III was issued by the Basel Committee on Banking Supervision (BCBS). They are called the Basel accords as the BCBS maintains its secretariat at the Bank for
International Settlements in Basel, Switzerland and the committee normally meets there. The Basel Accords is a set of
recommendations for regulations in the banking industry.
The impact of Basel III, also known as The Third Basel Accord, will vary by geography -- from potentially slowing down economies in emerging nations, to protecting the European Union from financial collapse, to increasing capital adequacy and improving risk management. Given the framework and timeline for implementing Basel III, the burden falls on national regulators to translate the international guidelines into national policies that suit and stabilize their economic environment and support economic growth.
This is the most comprehensive presentation on Indian Banking System. It starts with an introduction to the Financial system and role banks plays as Financial Intermediary. Post this the presentation touches on basic of banking like CRR SLR CASE and then money market and instrument cover. There is a comprehensive section of the evolution of Indian Banking system from pre-independence to 2018 in may phases. There is a dedicated section on the structure of Indian Banking system like PSU, Private & Foreign banks, Payment Banks, Small Finance Banks, NBFI, NBFC, AIFI, Co-operative segment. The presentation ends with current banking data as 2018 capturing the growth Deposit, Credit, Interest income & other income for Indian Banks.
Note:
Pls, reach to me on a.v.deshmukh@gmail.com if you wish to host a presentation on this.
History of Indian Capital Markets, structure, SEBI, market concepts - bear and bull markets, stop loss, top-down approach, types of shares - preferential, common equity, hybrid, small mid and large cap, how to read stock quote, PE Ratio and its applications, order FAQ, risks, stock market indices, demat & trading accounts
Merchant Banking - Indian Corporate Market, Clause 49 & Masala BondsAbhijeet Deshmukh
A comprehensive presentation on merchant banking. It starts with Indiann corporate bond market and go on to basics of merchant banking and it digs deep into merchant banking activity. It also has few slides on Clause 49 (Corporate governance) and ends with latest topic Masala Bonds
This is the comprehensive and latest presentation on Indian Corporate Bond market. It starts with basic features, 3 Main pillars of Indian Corp bond market ecosystem & its importance. It then covers Primary Placement, Valuation/MTM as per RBI/FIMMDA norms, Valuation using excel IRR() function with example, Credit rating scales, Market timing & Reporting.
It also covers few topics like ISIN & ends with challenges and Limitation of India corp bond market.
This presentation has two parts RBI & Monetary Policy.
It covers in detail the RBI, its history, preamble, organization structure, objectives, its functions in detail, its subsidiaries and all its publications with their links.
In the second part it covers Monetary Policy from Indian perspective. It starts with definition, Policy process followed in India, Goals, Framework. It covers the instruments of Monetary Policy in detail. It covers the future framework envisaged by RBI. In the last leg it covers the Contractionary & Expansionary monetary policy with their execution challenges.
This presentation covers the Payments systems in India. It starts with Introduction and then cover paper payment systems like Cheque Truncation System (CTS), MICR, CTS 2010. In Electronic payment systems it covers RTGS, IFSC, UTR No, NEFT, IMPS & difference between them. It also covers the limitations of Indian Payment system. In last leg it covers in detail SWIFT in details with latest statistics
This presentation covers Merchant Banking History; Categories; Services provided by them; Methods of placement; underwriting; Issue management & SEBI guidelines.
Government Securities - Classification and ValuationAbhijeet Deshmukh
This presentation in based on RBI Master circular on Government Securities Portfolio and its valuation. The presentation describes in detail 'Held to Maturity', 'Available for Sale' and 'Held for Trading'
www.abhijeetdeshmukh.com
This presentation is on RBI Primary Dealers. It covers history, eligibility, Roles and Obligations; Facilities offered by RBI and Regulatory returns to submitted by PD to RBI. It also covers in detail Underwriting process, MUC (Minimum Underwriting Commission) & ACU (Additional Competitive Underwriting). It also touches few key concepts like Short sale and When Issued.
www.abhijeetdeshmukh.com
This presentation is a comprehensive presentation of Forex Market. It starts with the history of this market from Pre Gold period, Bretton wood till current floating exchange mechanism and in Indian perspective FERA and FEMA. It then gives you an idea on size, width and extent of this market and post that it covers forex exchange, quotes, and numerical. Finally, it covers few topics like Trade Finance, LIBOR, Balance of Payment & Currency Swaps
This presentation broadly covers Mumbai University MMS Semester IV - Elective - Treasury Management.
It starts with History; factors leading to modern treasury management; main objectives; Integrated treasury; departments of treasury - Front, Middle and Back office.
www.abhijeetdeshmukh.com
This presentations chalks out in detail information about ALM in Indian Bank. It starts with the basics of Balance sheet; applicability of ALM in real life; Evolution and then starts with main topics of ALM like structured statement; Liquidity risk, its management; currency risk and finally ends with Interest Risk management.
Links to Video’s in the ppt
Balance Sheet
http://www.investopedia.com/terms/b/balancesheet.asp
NII/NIM
http://www.investopedia.com/terms/n/netinterestmargin.asp
www.abhijeetdeshmukh.com
how can I sell my pi coins for cash in a pi APPDOT TECH
You can't sell your pi coins in the pi network app. because it is not listed yet on any exchange.
The only way you can sell is by trading your pi coins with an investor (a person looking forward to hold massive amounts of pi coins before mainnet launch) .
You don't need to meet the investor directly all the trades are done with a pi vendor/merchant (a person that buys the pi coins from miners and resell it to investors)
I Will leave The telegram contact of my personal pi vendor, if you are finding a legitimate one.
@Pi_vendor_247
#pi network
#pi coins
#money
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
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What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
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Contact with Dawood Bhai Just call on +92322-6382012 and we'll help you. We'll solve all your problems within 12 to 24 hours and with 101% guarantee and with astrology systematic. If you want to take any personal or professional advice then also you can call us on +92322-6382012 , ONLINE LOVE PROBLEM & Other all types of Daily Life Problem's.Then CALL or WHATSAPP us on +92322-6382012 and Get all these problems solutions here by Amil Baba DAWOOD BANGALI
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Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
3. History…...
Historically, in 1970, the sudden failure of the Bretton Woods System resulted in the
occurrence of casualties in 1974 such as withdrawal of banking license of many banks.
“On 26 June 1974, German regulators forced the troubled Bank Herstatt into liquidation. That day, a
number of International banks had released payment of Deutsche Marks (DEM) to Herstatt in Frankfurt
in exchange for US Dollars (USD) that were to be delivered in New York. Because of time zone
differences, Herstatt ceased operations between the times of the respective payments.
The counterparty banks did not receive their USD payments.”
In 1975, three months after the closing of Franklin National Bank and other similar
disruptions, the central bank governors of the G-10 countries took the initiative to establish
a committee on Banking Regulations and Supervisory Practices in order to address such
issues.
This committee was later renamed as Basel Committee on Banking Supervision (BCBS)
The Committee acts as a forum where regular cooperation between the member countries
takes place regarding banking regulations and supervisory practices.
4. History
The Committee aims at improving supervisory knowhow and the quality of banking
supervision quality worldwide. Purpose of supervision is
to ensure that bank operates in a safe and sound manner.
to ensure that Bank “hold capital and reserves sufficient to support the risks that arise
in their business
Sound practices for bank’s risk management
The Committee formulates guidelines and provides recommendations on banking
regulation based on capital risk, market risk and operational risk.
Though the BCBS committee itself does not have any superior authority over the
governments and central banks to which it makes recommendations, but its guidelines are
broadly followed and well regarded in the international central banking and finance
community.
In a Nutshell :- ”An International Framework for Internationally Active Banks”
5. Pre Basel I Period (1975 – 1988)
From 1965 to 1981 there were about eight bank failures (or bankruptcies) in the United
States.
”Savings and Loan (S&L) crisis was one of the largest financial scandals in U.S. history, the Savings and
Loan Crisis emerged in the late 1970s and came to a head in the 1980s, finally ending in the early
1990s. S&L deposits were insured by the Federal Savings and Loan Insurance Corporation (FSLIC),
depositors continued to put money into these risky institutions. But S&L engaged in increasingly risky
corrupt activities, including commercial real estate lending and investments in junk bonds resulting
collapse of them. This led to the insolvency of the FSLIC, the government bailout of the thrifts to the
tune of $124 billion in taxpayer dollars and the liquidation of 747 insolvent S&Ls by the U.S.
government”
Highly leveraged Banks throughout the world were lending extensively, so much that the
potential for the bankruptcy of the these major international banks grew as a result of low
security / capital.
to prevent this risk, the Basel Committee on Banking Supervision, comprised of central banks
and supervisory authorities of 10 countries, met in 1987 in Basel, Switzerland.
The committee drafted a first document to set up an international 'minimum' amount of
capital that banks should hold. This minimum is a percentage of the total capital of a bank,
which is also called the minimum risk-based capital adequacy.
6. Basel – I / Basel Capital Accord-1988 - 1999
The General purpose of the Accord was
To strengthen the stability of International Banking System
To set up a fair and consistent international banking system in order to decrease competitive
inequality amongst international banks
In 1988, the Committee’s introduced capital measurement system / accord which mainly
focused on
the credit risk and
Minimum amount of Capital that bank should hold
The Committee, by the end of 1992, had implemented the minimum requirement ratio of
capital to be fixed at 8 percent of Risk-Weighted Assets.
The committee also issued Market Risk Amendment to the capital accord in January 1996
which came into effect at the end of 1997. A concept of Value At Risk (VaR) was introduced.
The capital requirement was set on the basis of higher of Previous day’s Value-at-risk or
Three times the average of the daily value-at-risk of the preceding sixty business days.
7. Basel Accord / Basel I – Four Pillars
The Basel I Accord attempted to create a cushion against credit risk. The norm comprised of
four pillars.
Pillar I – Constituents of Capital :- It prescribe the nature of capital that is eligible to be
treated as reserves. Capital is classified into Tier I and Tier II capital. The accord requires Tier
I capital to constitute at least 50 percent of the total capital base of the banking institution.
Pillar II – Risk Weighting :- Risk Weighting creates a comprehensive system to provide
weights to different categories of bank’s assets & liabilities
Pillar III – Target Standard Ratio :- Target Standard Ratio acts as a unifying factor between
the first two pillars. A universal standard, wherein Tier I and Tier II capital should cover at
least 8 percent of risk weighted assets of a bank, with at least 4 percent being covered by
Tier I capital.
Pillar IV – Transitional and Implementing Arrangement :- Transitional and implementing
arrangement sets different stages of implementation of the norms in a phased manner.
8. Key Concepts
Tier I Capital (Core Capital) :- It includes stock issues (or
share holder equity) and declared reserves such as Loan
Loss reserves set aside to cushion future losses or for
smoothing out income variation.
Tier II Capital (Supplementary Capital) :- It includes all
other capital such as revaluation reserves, undisclosed
reserves, hybrid instruments and subordinated term
debt. It also includes gain on investment assets , long
term debt with maturity greater than 5 years and hidden
reserves. However, short-term are not included.
10. CAR – Capital Adequacy Ratio
CRAR - Capital to Risk weighted Assets Ratio
11. Transition to Basel II from Basel I
Basel II was fundamentally conceived as a result of two triggers –
the banking crises of the 1990s on the one hand, and
the criticisms/limitations of Basel I itself on
Limited differentiation of credit risk : There were just four broad risk weightings (0%,
20%, 50% and 100%), based on an 8% minimum capital ratio.
No recognition of term-structure of credit risk : The capital charges are set at the same
level regardless of the maturity of a credit exposure.
Simplified calculation of future multi-country counterparty risk : The current capital
requirements ignore the different level of risks associated with different currencies
and their macroeconomic risk.
Lack of recognition of portfolio diversification effects: In reality, the sum of individual
risk exposures is not the same as the risk reduction through portfolio diversification.
Static measure of default risk: The assumption that a minimum 8% capital ratio is
sufficient to protect banks from failure does not take into account the changing nature
of default risk / banking scenario’s.
12. BASEL II
In the year 1999, a new, far more thorough capital adequacy accord was introduced which
was initially known as “A Revised Framework on International Convergence of Capital
Measurement and Capital Standards” (hereinafter referred to as Basel II)
For successful implementation of the new capital framework across borders, the
committee’s Supervision and Implementation Group (SIG) was formed.
The new framework was designed to
improve the way regulatory capital requirements reflect the underlying risks for
addressing the recent financial innovation.
focuses on the continuous improvements in risk measurement and control so as to
maintain consistency of regulations and to create uniform international standards for
Banking
It introduced ‘Operational Risk’; define new calculation for Credit Risk and for Market Risk, it
ensured that the capital allocation is more risk sensitive.
Also, a primary mandate of this accord was to widen the scope of regulation. This is
achieved by including ‘on a fully consolidated basis, any holding company that is the parent
entity within a banking group to ensure that it captures the risk of the whole banking
group’.
16. Pillar I – Min Capital Charge - Credit Risk
Standardized Approach: It directed banks to use ratings from external credit rating agencies
to compute capital requirements commensurate with the level of credit risk. There are 13
categories of individual assets specifically named in the Basel II accord with risk-weighting
norms.
Foundation - Internal Rating Based (FIRB) Model: gives banks the freedom to develop their
own models to ascertain risk weights for their assets. These are, however, subject to the
approval of the banking regulator. Further, the regulators provide the model assumptions –
loss given default2 (LGD), exposure at default (EAD), and effective maturity4 (M). Banks are,
however, allowed to use their own estimates of the probability of default5 (PD).
Advanced IRB (AIRB): It is fundamentally the same as Foundation IRB, except that banks are
free to use their own assumptions (of LGD, EAD and M) in the models they develop.
Understandably, this approach can be used only by a select set of banks.
By design, the IRB approaches are ‘self-regulating mechanisms’& from a regulatory standpoint,
this translates into lower legal and regulatory costs.
17. Pillar I – Min Capital Charge - Operational Risk
The Basic Indicator Approach: It suggests that banks hold 15 percent of their average
annual gross income (over the past three years) as capital. On the basis of risk assessments
of individual banks, regulators may adjust the 15 percent threshold
The Standardized Approach: It basically splits a bank into compartments based on its
business lines. The idea is that business lines with lower operational risk (asset
management, for instance) would translate into lower reserve requirements.
The Advanced Measurement Approach: It gives banks the freedom to perform their own
computations for operational risk. Once again, these are subject to regulatory approval.
They share similarity with Credit Risk – IRB Model in terms of their ‘Self Regulation’ nature.
18. Pillar I – Min Capital Charge - Market Risk
Market Risk (Fixed Income Assets)
Market risk is simply the risk of loss as a result of movements in the market prices of assets.
Basel II makes two clear distinctions – one in respect of asset categories, and the other
regarding types of principal risks (interest rate risk and volatility risk)
Value at Risk (VaR) measure is put forth for Fixed Income Assets. Banks can use their own
computations (subject to regulatory approval)
Basel II proposes two distinct risk protection methods for banks, who couldn’t follow VaR
method:
In respect of interest rate risk, the reserve requirements are mapped to the maturity of the
asset
In terms of volatility risk, the correspondence is established through credit risk ratings of the
assets
19. VaR
Value at Risk (VaR) is the most probable loss that we may incur in normal market
conditions over a given period due to the volatility of a factor, exchange rates, interest
rates or commodity prices.
The probability of loss is expressed as a percentage – VaR at 95% confidence level,
implies a 5% probability of incurring the loss;
at 99% confidence level the VaR implies 1% probability of the stated loss.
The loss is generally stated in absolute amounts for a given transaction value (or value of
a investment portfolio).
The VaR is an estimate of potential loss, always for a given period, at a given confidence
level. For e.g. A VaR of 5p in USD / INR rate for a 30- day period at 95% confidence level
means that Rupee is likely to lose 5p in exchange value with 5% probability, or in other
words, Rupee is likely to depreciate by maximum 5p on 1.5 days of the period (30*5% ) .
A VaR of Rs. 100,000 at 99% confidence level for one week for a investment portfolio of
Rs. 10,000,000 similarly means that the market value of the portfolio is most likely to
drop by maximum Rs. 100,000 with 1% probability over one week, or , 99% of the time
the portfolio will stand at or above its current value.
20. Market Risk (Non Fixed Income Assets)
The Standard / Simplified Approach: It puts assets into compartments based on certain
parameters: type, origin, maturity, and volatility. It then gives risk weights – from 2.25
percent for the least risky assets to 100 percent for the most risky assets.
The Standard / Scenario Analysis: the risk weights are assigned by taking into
consideration the scenarios that could exist in each country’s markets. This method is
clearly less conservative, and thus allows banks to be more experimental. Yet, it comes
with its complexity.
The Internal Model Approach: It gives banks the choice to design their own market risk
models.
Total Capital Adequacy Reserves =
[0.08 * Risk-Weighted Assets + Operational Risk Reserves + Market Risk Reserves]
Pillar I – Min Capital Charge - Market Risk
21. Basel II - Pillar II & III
Pillar II – Supervisory Review Process: It focuses on the aspect of regulator-bank interaction.
Specifically, it empowers regulators in matters of supervision and dissolution of banks. For
instance, regulators may supervise internal risk evaluation mechanisms outlined in Pillar I –
and change them to more conservative or simpler ones, as the case demands. Regulators
are permitted to create a buffer capital requirement over and above the minimum capital
requirements as per Pillar I.
Pillar III – Market Discipline: It aims to induce discipline within the banking sector of a
country. Basel II suggested that, disclosures of the bank’s capital and risk profiles which
were shared solely with regulators till this point should be made public. The premise was
that information to shareholders could be widely disseminated. They would be able to
ensure prudence in the risk levels of banks.
22. Transition to Basel III from Basel II
Basel Committee declared that the committee’s recommendations were for G-10 member
states. This leaves out emerging economies, and actually implied potential unfavorable
impact on these economies.
The scope of responsibilities for regulators (in emerging economies) may be too much for
them to handle.
Central banks might not be stringent enough in regulating private banks, thus letting them
raise their risk exposure – defeating the entire purpose.
Banks in emerging economies were at a disadvantage in terms of receiving loans from
global banks. The consequence here was that global banks would need to maintain more
capital for a loan to an emerging market bank on recommendation of external credit rating
agencies.
Basic assumption was pre-cyclical process and thus it failed to consider capital requirements
during Inflation/Deflation of the Economy.
Depends on good underlying data; complex to implement for emerging Banking system
and hence required skilled supervision and high depend on external credit rating agencies.
23. Basel 2.5 (2009 – 2010)
The financial crisis of 2007 and 2008 exposed the limitations of Basel II, wherein certain risks
were not under the purview of this regulation.
Augmenting the Value-at-Risk based trading book framework with an additional charge for risk
capital, including mitigation risk and default risk.
Addition of stressed value-at-risk condition. This condition takes into account probability of
significant losses over a period of one year
But above two conditions were incorporated into Basel III in 2010.
24. Basel III 2010… - 2019
The essence of Basel III revolves around two sets of compliance:
i. Capital
ii. Liquidity
While good quality of capital will ensure stable long term sustenance, compliance with
liquidity covers will increase ability to withstand short term economic and financial stress.
Liquidity Rules: One of the objectives of Basel III accord is to strengthen the liquidity
profile of the banking industry. This is because despite having adequate capital levels,
banks still experienced difficulties in the recent financial crisis. Hence, two standards of
liquidity were introduced
26. Capital – CCB & CCCB
Capital Conservation Buffer : The intention behind it is to make certain that banks
accumulate capital buffers in times of low financial stress. When the buffer is utilized, banks
need to recreate it by pruning their discretionary distribution of earnings. Banks facing
reduced capital buffers must certainly not signal their financial strength by way of
distributing earnings. Thus, the accord enforces constraints on distribution of earnings.
Basel III prescribes Buffer of 2.5 percent above the minimum capital requirement. This
buffer is built out of Common Equity Tier 1 (CETI)11, only after the 6 percent Tier 1 and 8
percent total capital requirements have been fulfilled.
Counter-Cyclical Buffer : The underlying premise of the countercyclical buffer is that capital
requirements in the banking sector must take into consideration the macroeconomic
environment in which banks operate. Banks must arm themselves with capital buffers in
times of rapidly-growing financial stress. It will be enacted by national authorities, when
they believe that the excess credit growth potentially implies a threat of financial distress.
The buffer for internationally-active banks is computed as a weighted average of the
buffers for all jurisdictions where the bank bears a credit exposure. Banks would be subject
to a countercyclical buffer between zero and 2.5 percent of their total risk-weighted assets
27. Liquidity - LCR & NSFR
Liquidity Coverage Ratio (LCR) : LCR was introduced with the objective of promoting efficacy
of short term liquidity risk profile of the banks. This is ensured by making sufficient
investment in short term high quality liquid assets, which can be quickly and easily
converted into cash, such that it financial institution to withstand sustained financial stress
for 30 days period.
Net Stable Funding Ratio (NSFR) : It incentivizes banks to obtain financing through stable
sources on an ongoing basis. the standard requires that a minimum quantum of stable and
risk less liabilities are utilized to acquire long term assets. The objective is to deter reliance
on short term means of finance, especially during favorable market periods. The NSFR has a
time horizon of one year
28. Liquidity – Leverage Ratio
A critical characteristic of the 2007-08 financial crisis was the overuse of on- and off-
balance sheet leverage in the banking sector.
banks portrayed healthy risk based capital ratios. However, when banks had no choice but
to reduce leverage in the worst part of the crisis, a vicious circle was created
The leverage ratio was incorporated in order to have a non-risk based metric in addition to
the risk based capital requirements in place.
the primary intentions were thus to control the tendency of excessive leverage and
strengthen risk based requirements.
Since the implementation of Basel III involves significant changes in capital structure, the
same shall be implemented in a phase wise manner till 2019
30. Key points related to Indian scenario
The implementation of Basel III norms commenced in India from April 1, 2013 in a phased
manner, with full compliance initially targeted to be achieved by March 31, 2018 but
extended to March 31, 2019.
The Reserve Bank of India specified minimum Tier 1 Leverage Ratio of 4.5 percent during
the parallel run period as against the Basel Committee’s minimum Tier 1 leverage ratio of 3
percent.
the biggest concern for the financial sector is the growing volume of the Restructured
Assets and Non-Performing Assets (NPA), a framework for revitalizing distressed assets has
been implemented in the economy which has come into effect from April 2014.
The RBI prescribes a minimum Capital to Risk Weighted Asset Ratio (CRAR) at 9 percent,
higher than 8 percent prescription of Basel III accord.
According to the CARE’s estimate, the total equity capital requirement for Indian banks till
March 2019 is likely to be in the range of Rs. 70,000 crores assuming that the average GDP
growth will be 6 percent and the average credit growth will be in the range of 15 percent
to 16 percent over the next five years.