The document discusses Basel regulations on bank capital requirements. It provides an overview of Basel I, Basel II, and Basel III. Basel I introduced uniform capital adequacy calculations but had limitations. Basel II aimed to address Basel I deficiencies by introducing operational risk and more risk-sensitive credit risk calculations. Basel III further strengthened regulations by requiring higher quality capital holdings and introducing leverage ratios. The implications for small- and medium-sized enterprises include potentially higher credit costs, an increased focus on risk ratings, and a need for greater financial transparency.

1. Berat BAŞAT
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2. BIS
Basel Committee
BASEL I
BASEL II
Comparison of Basel I – Basel II
BASEL III
Implications on SME’s
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3. - To operate as the Central Bank of Europe,
- To organize international payments system formed by
central banks of countries.
- The oldest international financial institution
- Remains the principal center for international central
bank cooperation.
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4. Basel Committee Basel Committee on Banking Supervision
- Founded in 1975 by the central bank governors of the
Group of Ten countries
Main Goals:
- To improve the understanding
of key challenges in supervision
- To improve quality of banking
supervision worldwide
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5. BASEL I
The purpose of Basel I standards was to introduce a
uniform way of calculating capital adequacy
Risk Weight % Asset Category
0% for governments of OECD countries
10 % public institutions of OECD countries
20 % OECD countries’ banks
50 % credits for housing mortgage securities.
100 % for other countries’ governmental and
private institutions 5

6. Capital
CAR: ≥ 8%
Credit Risk + Market Risk
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7. The bank has to maintain capital equal to at least 8% of
its risk-weighted assets.
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8. BENEFITS OF BASEL I STANDARDS
- Substantial increases in capital adequacy ratios of
internationally active banks;
- Relatively simple structure;
- Worldwide adoption;
- Increased competitive equality among internationally
active banks;
- Greater discipline in managing capital;
- A benchmark for assessment by market participants.
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9. WEAKNESSES OF
BASEL I
STANDARDS
 Limited differentiation of credit risk
 Static measure of default risk
 No recognition of term-structure of credit risk
 Lack of recognition of portfolio diversification effects.
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10. BASEL II STANDARDS Prepared in 2001
Published in 2004
Basel I Applied in 2007
 to set the minimal capital requirements
Basel II
 to remove the deficiencies of Basel I Accords
to measure the risks with more sensitive methods
to set an effective risk management system,
to develop a market discipline,
To increase the efficiency of measurement of capital
requirements constructing a robust banking system
and ensuring financial stability 10

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12. Pillar one explains the new capital adequacy ratio. Basel II
standards added the operational risk to the denominator of
capital adequacy ratio for the first time. In addition, credit
risk is detailed whereas the market risk remains the same.
So the new ratio shaped like the following
Capital Adequacy Ratio:
Capital
≥ 8%
Credit Risk + Market Risk + Operational Risk 12

13. Pillar two basically
focuses on the duty and
responsibilities of the
regulatory authorities
According to the pillar two, banks need to construct more
powerful risk management systems and increase the
importance of internal control.
Provides a framework for dealing with all the other risks a
bank may face (such as systematic risk, liqudity risk)
Recommends active interaction between banks and their
supervisors
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14. Basel II should maintain security
and robustness in financial system
therefore protect the capital at least
in its current state.
Aims to promote greater stability in the financial system.
Encourages prudent management and transparency in
financial reporting of banks.
Focuses on effective disclosure of information and
specifies the nature and type of information that should be
reported to market participants.
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15. COMPARISON
BASEL 1 BASEL 2
Consideration of only credit A more comprehensive
and market risks. approach to CAR and
consideration of ‘operational risk’.
Use of risk ratings given by
• Differentiation of OECD credit rating institutions to
membership to determine credit determine credit risks.
risks. Alternative methods for each
• Use of only one method of risk risk category and use of banks’
quantification. risk measurement methods.
Emphasis on risk management.
• Same supervisory approach 3 pillars concept, emphasis on
for all financial institutions. supervisory and market discipline
and regulations on these issues.
• Emphasis is only on
minimum CAR.
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16. BASEL III
Basel III is a new global regulatory standards on bank
capital adequacy, leverage and liquidity to strenghten
supervision and risk management of banking sector.
Requires banks to hold more capital and higher quality of
capital than Basel II requirements.
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17. PROPOSED CHANGES
1 - The quality, consistency, and transparency of the new
capital base will be raised.
Tier1: Capital must be common shares and retained
earnings.
Tier2: Instruments will be harmonized.
Tier3: Capital will be eliminated
2 - The risk coverage of the capital framework will be
strengthened.
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18. 3 - The committee will introduce a leverage ratio as a
supplementary measure to the Basel II risk based
framework
4 - The committee is reviewing the need for additional
capital, liquidity or other supervisory measures to reduce
the externalities created by systematically important
situations.
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19. IMPORTANCE OF SME’s
- SMEs tend to employ more labor-intensive production
processes than large enterprises. Accordingly, they
contribute significantly to the new employment
opportunities, the generation of income and ultimately,
the reduction of poverty.
- SMEs are keys to the transition of agricultural to
industrial economies as they provide simple opportunities
for processing activities
- SMEs are good examples for entrepreneurship
development, innovation and risk taking behavior and the
transition towards larger enterprises
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20. SMEs
support the building up of systemic productive capacities.
help to absorb productive resources at all levels of the
economy
contribute to the creation of flexible economic systems in
which small and large firms are interlinked.
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21. IMPLICATIONS ON SME’s
In order to determine capital adequacy in Basel II, SME
classification limits are determined according to total gross
sales.
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22. If banks do not use the advanced methodologies that Basel
II proposes, their capital needs will increase and this will
bring out the situation that they convey this extra cost to
their credit packages. The consequence has noticeable
implications on SMEs especially in developing countries.
In contrast, if banks apply Basel II Standard and its total
loan exceed one million Euros, it will be evaluated in the
corporate portfolio and the risk rating note that is given by
external rating agencies will be considered by the banks.
This situation will inevitably affect the enterprises that use
high amount of loans.
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23. The percentage of SMEs out of the total number of firms
in OECD countries is greater than 97 percent, generating
over half of private sector employment.
Their contribution to employment, adoptability to new
developments due to their flexible nature, creation of
product differentiation, provision of intermediate goods are
considerable attribution for an economy.
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24. Ratings and Interest Rates
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26. - Definition of SMEs has been changed
- Credit pricing will be made related to risk
- SME’s will have to take a degree from banks or rating
agencies in order to determination of its credit risk
- The assets that can be showed as a warranty has
been redefined.
-Registration and reporting of financial information and
transparency has become much more important.
-The SMEs will try to seek different sources of finances
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