The document discusses Basel, an international banking standards organization. It provides background on Basel I and II, which established minimum capital requirements and risk management standards for banks. Basel II had three pillars: minimum capital requirements, supervisory review, and market discipline. Basel III was then introduced after the 2008 financial crisis to strengthen regulations with stricter capital and liquidity standards, as well as additional buffers to improve banks' ability to withstand financial stress.
The Basel Committee was formed by central bank governors of G10 countries to enhance banking supervision worldwide. It is best known for its capital adequacy standards. Basel I (1988) focused on credit risk capital requirements. Basel II (2004) added operational risk and market risk requirements, and introduced three pillars for minimum capital standards, supervisory review, and market discipline. Basel III (2010) was introduced after the 2008 crisis to strengthen banks' capital reserves and introduce leverage ratios and liquidity requirements to improve financial stability. The three pillars of Basel II were retained in Basel III to balance bank stability and transparency.
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.
Basel III is an international regulatory framework that aims to strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and leverage. It was implemented in Bangladesh to improve regulation of banks and address shortcomings of previous Basel accords. Key aspects include higher capital conservation buffers, a countercyclical capital buffer, and eliminating tier 3 capital. The buffers were phased in fully by 2019 and must be met with high-quality Common Equity Tier 1 capital to ensure banks can withstand periods of financial stress. Basel III thus enhances capital standards and promotes a more stable and resilient banking sector in Bangladesh.
Basel II is an international standard that aims to strengthen the regulation, supervision and risk management within the banking sector. It improves upon Basel I by making capital requirements more risk sensitive and aligning regulatory capital more closely with underlying bank risks. Basel II consists of three pillars that cover minimum capital requirements, supervisory review, and market discipline. Implementation of Basel II varies across countries and regulators but aims to modernize capital adequacy standards to be more comprehensive and risk sensitive.
Basel II and III are international banking regulatory accords that establish capital requirements and risk management standards. Basel II, established in 1988, focused on credit risk but did not adequately address operational and market risk. Basel III, developed after the 2008 crisis, strengthened capital and liquidity requirements and introduced leverage and liquidity ratios. The Basel accords aim to ensure banks maintain adequate capital reserves to absorb losses and promote stable, risk-sensitive banking globally.
The document discusses the Basel II Accords, which establish international standards for banking regulations and capital requirements. Basel II aims to make capital requirements more risk-sensitive by measuring credit, operational, and market risks. It introduces a three pillar framework: Pillar 1 sets minimum capital standards; Pillar 2 establishes supervisory review; and Pillar 3 promotes market discipline through disclosure. Implementation of Basel II varies by country and bank sophistication in risk measurement. The overall goal is a safer, more stable global banking system.
Basel II is an international standard that establishes capital requirements for banks to guard against financial and operational risks. It consists of three pillars: minimum capital requirements to cover credit, market and operational risks; supervisory review to ensure adequate capital to cover all risks; and market discipline through disclosure requirements. While Basel II aims to make capital requirements more risk sensitive, Indian banks face challenges in implementing it due to lack of risk management expertise, need for technology investments, and restructuring of non-performing assets. A gradual implementation process will help ensure a smooth transition to the new framework.
The document discusses Basel, an international banking standards organization. It provides background on Basel I and II, which established minimum capital requirements and risk management standards for banks. Basel II had three pillars: minimum capital requirements, supervisory review, and market discipline. Basel III was then introduced after the 2008 financial crisis to strengthen regulations with stricter capital and liquidity standards, as well as additional buffers to improve banks' ability to withstand financial stress.
The Basel Committee was formed by central bank governors of G10 countries to enhance banking supervision worldwide. It is best known for its capital adequacy standards. Basel I (1988) focused on credit risk capital requirements. Basel II (2004) added operational risk and market risk requirements, and introduced three pillars for minimum capital standards, supervisory review, and market discipline. Basel III (2010) was introduced after the 2008 crisis to strengthen banks' capital reserves and introduce leverage ratios and liquidity requirements to improve financial stability. The three pillars of Basel II were retained in Basel III to balance bank stability and transparency.
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.
Basel III is an international regulatory framework that aims to strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and leverage. It was implemented in Bangladesh to improve regulation of banks and address shortcomings of previous Basel accords. Key aspects include higher capital conservation buffers, a countercyclical capital buffer, and eliminating tier 3 capital. The buffers were phased in fully by 2019 and must be met with high-quality Common Equity Tier 1 capital to ensure banks can withstand periods of financial stress. Basel III thus enhances capital standards and promotes a more stable and resilient banking sector in Bangladesh.
Basel II is an international standard that aims to strengthen the regulation, supervision and risk management within the banking sector. It improves upon Basel I by making capital requirements more risk sensitive and aligning regulatory capital more closely with underlying bank risks. Basel II consists of three pillars that cover minimum capital requirements, supervisory review, and market discipline. Implementation of Basel II varies across countries and regulators but aims to modernize capital adequacy standards to be more comprehensive and risk sensitive.
Basel II and III are international banking regulatory accords that establish capital requirements and risk management standards. Basel II, established in 1988, focused on credit risk but did not adequately address operational and market risk. Basel III, developed after the 2008 crisis, strengthened capital and liquidity requirements and introduced leverage and liquidity ratios. The Basel accords aim to ensure banks maintain adequate capital reserves to absorb losses and promote stable, risk-sensitive banking globally.
The document discusses the Basel II Accords, which establish international standards for banking regulations and capital requirements. Basel II aims to make capital requirements more risk-sensitive by measuring credit, operational, and market risks. It introduces a three pillar framework: Pillar 1 sets minimum capital standards; Pillar 2 establishes supervisory review; and Pillar 3 promotes market discipline through disclosure. Implementation of Basel II varies by country and bank sophistication in risk measurement. The overall goal is a safer, more stable global banking system.
Basel II is an international standard that establishes capital requirements for banks to guard against financial and operational risks. It consists of three pillars: minimum capital requirements to cover credit, market and operational risks; supervisory review to ensure adequate capital to cover all risks; and market discipline through disclosure requirements. While Basel II aims to make capital requirements more risk sensitive, Indian banks face challenges in implementing it due to lack of risk management expertise, need for technology investments, and restructuring of non-performing assets. A gradual implementation process will help ensure a smooth transition to the new framework.
The document discusses the evolution of the Basel Accords from 1988 to the present. It highlights that:
1) Basel I, adopted in 1988, aimed to strengthen bank stability and create equal competition. However, it only considered credit risk and encouraged regulatory arbitrage.
2) Basel II, introduced in 2004, aimed to make capital requirements more risk-sensitive by incorporating banks' internal risk management. It included three pillars for minimum capital, supervisory review, and market discipline.
3) While Basel III, finalized in 2010 after the financial crisis, aims to mitigate past damage, the results of its stricter capital standards are still to be seen as countries implement its guidelines.
The document discusses the Basel Accords, which are recommendations issued by the Basel Committee on Banking Supervision to strengthen the regulation, supervision, and risk management of the banking sector. It describes the key aspects of Basel I, issued in 1988, and Basel II, issued in 2004. Basel II built on Basel I by establishing three pillars: Pillar 1 sets minimum capital requirements; Pillar 2 establishes supervisory review; and Pillar 3 promotes market discipline through disclosure. The overall goal was to better align regulatory capital with risks and encourage sound risk management practices.
Risk management in banking sector project report mba financeBabasab Patil
This document discusses risk management in the banking sector. It introduces the concepts of risk management and provides definitions of key risk types including credit risk, market risk, operational risk, and regulatory risk. It also summarizes Basel II, the international banking accord that introduced a risk-based capital adequacy framework. The framework has three pillars: minimum capital requirements, supervisory review, and market discipline. Effective risk management and maintaining adequate capital are important for banking stability and soundness.
The document discusses the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It outlines Basel I, introduced in 1988, which focused on credit risk. Basel II, introduced in 2004, takes a three pillar approach focusing on minimum capital requirements, supervisory review, and market discipline. It aims to make capital requirements more risk sensitive. Some benefits of Basel II include improved risk management and efficiency, while challenges include lack of historical data and difficulty accounting for diversity across countries.
The Basel Committee on Banking Supervision was established in 1974 in response to the Herstatt Bank failure and worked to establish common global banking standards and regulations. It has developed 3 accords - Basel I in 1988 focused on credit risk, Basel II in 2004 expanded coverage of risks, and Basel III from 2010 onward strengthened bank capital requirements and introduced new regulatory requirements on bank liquidity and leverage. The Basel accords aim to create a stable and consistent global framework for banking supervision and regulation.
The Basel Committee on Banking Supervision was created in 1974 by central bank governors of Group of Ten nations. It meets four times a year at the Bank for International Settlements in Basel, Switzerland. The Basel I Accord of 1988 aimed to strengthen banking stability and consistency. It assigned risk weights to asset classes from 0% to 100%. Basel II, created in response to Basel I limitations, introduced three pillars: minimum capital requirements, supervisory review, and market discipline. Pillar 1 separates credit and operational risk. Pillar 2 covers banks' risk assessments and supervisory review. Pillar 3 mandates risk disclosures. The RBI implemented Basel I in 1993 and Basel II in 2007 for Indian banks, using standardized approaches
Basel II is an international banking accord that establishes capital requirements for banks. It aims to create an international standard for how much capital banks need to put aside to guard against financial and operational risks. Basel II includes three pillars: minimum capital requirements, supervisory review, and market discipline. It addresses deficiencies in Basel I by incorporating additional risk categories like credit and operational risk. Implementing Basel II poses challenges for Indian banks like increased capital requirements, the need for risk management expertise and technology investments. However, gradual implementation could help Indian banks migrate smoothly to the new framework.
This document discusses the Capital Adequacy Ratio (CAR) and its evolution over time from Basel I to Basel III. It defines CAR as the ratio of a bank's capital to its risk-weighted assets. Basel I established an initial CAR requirement of 8% in 1988. Basel II introduced a more risk-sensitive approach and recognized additional risks. Basel III further strengthened regulations by improving capital quality and introducing liquidity requirements. The overall purpose was to increase stability in the banking system and strengthen a bank's ability to absorb financial and economic shocks.
The document discusses the Capital Adequacy Ratio (CAR) and its evolution over time from Basel I, II, and III accords. CAR is a ratio used by regulators to assess a bank's capital adequacy by comparing its capital to risk-weighted assets. The Basel accords established international standards for CAR and defined components like Tier 1 capital, Tier 2 capital, and risk weighting of assets. Basel III aimed to strengthen banks' ability to absorb shocks by improving capital quality and introducing liquidity ratios and leverage ratios.
The Basel Accords are a series of banking regulations established by the Basel Committee on Banking Supervision. The document discusses the history and objectives of the Basel Accords. It explains that the Basel Committee was established in 1974 to improve banking supervision globally and set minimum capital requirements for banks. The Basel I Accord established the first capital requirements in 1988. Subsequent accords like Basel II and III enhanced regulations around capital adequacy ratios, risk management, disclosure, and liquidity to promote global financial stability.
Basel III is a global regulatory standard that aims to strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and leverage. It was implemented in response to deficiencies in the previous Basel II framework that were exposed by the global financial crisis. The goals of Basel III include improving the banking sector's ability to absorb shocks, reducing systemic risk, and increasing transparency. It establishes stricter capital standards, introduces capital buffers, and imposes new liquidity measures including the liquidity coverage ratio and net stable funding ratio.
SoSeBa Bank - Risk Managment of a fictitious BankAlliochah Gavyn
The document discusses risk management at SoSeBa Bank in Mauritius. It introduces the bank and outlines its mission to provide banking services to the working class population. It then discusses key risks like credit, liquidity, and market risk that the bank needs to measure and manage. It provides an overview of banking regulations in Mauritius as well as international standards like the Basel Accords. The document emphasizes the importance of robust risk management practices like risk modeling, exposure limits, and stress testing for the long-term success of the new bank.
The Basel III regulations are devised to mitigate damage to the economy caused by banks that take on excess risk. This third instalment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is aimed at improving the banking sector's ability to deal with financial stress, improve risk management, and strengthen the banks' transparency. It is part of the continuous effort to enhance the banking regulatory framework and builds on the Basel I and Basel II documents.
The document summarizes the history and development of the Basel Committee on Banking Supervision and the Basel Accords. It discusses how the Basel Committee was formed in 1974 in response to banking crises. It then describes the three Basel Accords - Basel I established minimum capital requirements in 1988, Basel II introduced additional risk-based requirements in 2004, and Basel III strengthened capital and liquidity standards following the 2008 financial crisis. The document provides details on the pillars and key provisions of each accord.
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
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.
Basel II is an international banking standard that recommends regulations for how much capital banks must hold. It aims to make capital requirements more risk sensitive by aligning them with banks' financial and operational risks. The three pillars of Basel II are: 1) Minimum capital requirements based on credit, market, and operational risk; 2) Supervisory review of risk profiles and capital adequacy; 3) Market discipline through disclosure and transparency. Implementing Basel II poses challenges for Indian banks like additional capital requirements and favoring large banks with stronger risk management.
Basel I, II, and III are agreements that established regulatory standards for bank capital adequacy. Basel I, established in 1988, focused on credit risk and set minimum capital requirements of 8% of risk-weighted assets. Basel II, released in 2004, included three pillars: Pillar I established a revised minimum capital framework; Pillar II covered supervisory review; and Pillar III addressed market discipline through disclosure. It recommended a minimum ratio of total capital to risk-weighted assets of 8% and prescribed the minimum capital adequacy ratio of 9% for India. Basel III, finalized in 2017, strengthened bank capital requirements in response to the 2008 financial crisis.
The document discusses the Basel Committee on Banking Supervision and the Basel Accords. It provides background on the BIS and establishes that the Basel Committee published Basel I in 1988 to establish minimum capital requirements for banks. Basel I focused on credit risk and classified assets into risk weight categories. It aimed to strengthen stability in international banking and decrease competitive inequality. However, Basel I had limitations like simplistic risk differentiation and a static view of default risk. This led to the development of Basel II.
The document discusses the evolution of the Basel Accords from 1988 to the present. It highlights that:
1) Basel I, adopted in 1988, aimed to strengthen bank stability and create equal competition. However, it only considered credit risk and encouraged regulatory arbitrage.
2) Basel II, introduced in 2004, aimed to make capital requirements more risk-sensitive by incorporating banks' internal risk management. It included three pillars for minimum capital, supervisory review, and market discipline.
3) While Basel III, finalized in 2010 after the financial crisis, aims to mitigate past damage, the results of its stricter capital standards are still to be seen as countries implement its guidelines.
The document discusses the Basel Accords, which are recommendations issued by the Basel Committee on Banking Supervision to strengthen the regulation, supervision, and risk management of the banking sector. It describes the key aspects of Basel I, issued in 1988, and Basel II, issued in 2004. Basel II built on Basel I by establishing three pillars: Pillar 1 sets minimum capital requirements; Pillar 2 establishes supervisory review; and Pillar 3 promotes market discipline through disclosure. The overall goal was to better align regulatory capital with risks and encourage sound risk management practices.
Risk management in banking sector project report mba financeBabasab Patil
This document discusses risk management in the banking sector. It introduces the concepts of risk management and provides definitions of key risk types including credit risk, market risk, operational risk, and regulatory risk. It also summarizes Basel II, the international banking accord that introduced a risk-based capital adequacy framework. The framework has three pillars: minimum capital requirements, supervisory review, and market discipline. Effective risk management and maintaining adequate capital are important for banking stability and soundness.
The document discusses the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It outlines Basel I, introduced in 1988, which focused on credit risk. Basel II, introduced in 2004, takes a three pillar approach focusing on minimum capital requirements, supervisory review, and market discipline. It aims to make capital requirements more risk sensitive. Some benefits of Basel II include improved risk management and efficiency, while challenges include lack of historical data and difficulty accounting for diversity across countries.
The Basel Committee on Banking Supervision was established in 1974 in response to the Herstatt Bank failure and worked to establish common global banking standards and regulations. It has developed 3 accords - Basel I in 1988 focused on credit risk, Basel II in 2004 expanded coverage of risks, and Basel III from 2010 onward strengthened bank capital requirements and introduced new regulatory requirements on bank liquidity and leverage. The Basel accords aim to create a stable and consistent global framework for banking supervision and regulation.
The Basel Committee on Banking Supervision was created in 1974 by central bank governors of Group of Ten nations. It meets four times a year at the Bank for International Settlements in Basel, Switzerland. The Basel I Accord of 1988 aimed to strengthen banking stability and consistency. It assigned risk weights to asset classes from 0% to 100%. Basel II, created in response to Basel I limitations, introduced three pillars: minimum capital requirements, supervisory review, and market discipline. Pillar 1 separates credit and operational risk. Pillar 2 covers banks' risk assessments and supervisory review. Pillar 3 mandates risk disclosures. The RBI implemented Basel I in 1993 and Basel II in 2007 for Indian banks, using standardized approaches
Basel II is an international banking accord that establishes capital requirements for banks. It aims to create an international standard for how much capital banks need to put aside to guard against financial and operational risks. Basel II includes three pillars: minimum capital requirements, supervisory review, and market discipline. It addresses deficiencies in Basel I by incorporating additional risk categories like credit and operational risk. Implementing Basel II poses challenges for Indian banks like increased capital requirements, the need for risk management expertise and technology investments. However, gradual implementation could help Indian banks migrate smoothly to the new framework.
This document discusses the Capital Adequacy Ratio (CAR) and its evolution over time from Basel I to Basel III. It defines CAR as the ratio of a bank's capital to its risk-weighted assets. Basel I established an initial CAR requirement of 8% in 1988. Basel II introduced a more risk-sensitive approach and recognized additional risks. Basel III further strengthened regulations by improving capital quality and introducing liquidity requirements. The overall purpose was to increase stability in the banking system and strengthen a bank's ability to absorb financial and economic shocks.
The document discusses the Capital Adequacy Ratio (CAR) and its evolution over time from Basel I, II, and III accords. CAR is a ratio used by regulators to assess a bank's capital adequacy by comparing its capital to risk-weighted assets. The Basel accords established international standards for CAR and defined components like Tier 1 capital, Tier 2 capital, and risk weighting of assets. Basel III aimed to strengthen banks' ability to absorb shocks by improving capital quality and introducing liquidity ratios and leverage ratios.
The Basel Accords are a series of banking regulations established by the Basel Committee on Banking Supervision. The document discusses the history and objectives of the Basel Accords. It explains that the Basel Committee was established in 1974 to improve banking supervision globally and set minimum capital requirements for banks. The Basel I Accord established the first capital requirements in 1988. Subsequent accords like Basel II and III enhanced regulations around capital adequacy ratios, risk management, disclosure, and liquidity to promote global financial stability.
Basel III is a global regulatory standard that aims to strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and leverage. It was implemented in response to deficiencies in the previous Basel II framework that were exposed by the global financial crisis. The goals of Basel III include improving the banking sector's ability to absorb shocks, reducing systemic risk, and increasing transparency. It establishes stricter capital standards, introduces capital buffers, and imposes new liquidity measures including the liquidity coverage ratio and net stable funding ratio.
SoSeBa Bank - Risk Managment of a fictitious BankAlliochah Gavyn
The document discusses risk management at SoSeBa Bank in Mauritius. It introduces the bank and outlines its mission to provide banking services to the working class population. It then discusses key risks like credit, liquidity, and market risk that the bank needs to measure and manage. It provides an overview of banking regulations in Mauritius as well as international standards like the Basel Accords. The document emphasizes the importance of robust risk management practices like risk modeling, exposure limits, and stress testing for the long-term success of the new bank.
The Basel III regulations are devised to mitigate damage to the economy caused by banks that take on excess risk. This third instalment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is aimed at improving the banking sector's ability to deal with financial stress, improve risk management, and strengthen the banks' transparency. It is part of the continuous effort to enhance the banking regulatory framework and builds on the Basel I and Basel II documents.
The document summarizes the history and development of the Basel Committee on Banking Supervision and the Basel Accords. It discusses how the Basel Committee was formed in 1974 in response to banking crises. It then describes the three Basel Accords - Basel I established minimum capital requirements in 1988, Basel II introduced additional risk-based requirements in 2004, and Basel III strengthened capital and liquidity standards following the 2008 financial crisis. The document provides details on the pillars and key provisions of each accord.
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
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.
Basel II is an international banking standard that recommends regulations for how much capital banks must hold. It aims to make capital requirements more risk sensitive by aligning them with banks' financial and operational risks. The three pillars of Basel II are: 1) Minimum capital requirements based on credit, market, and operational risk; 2) Supervisory review of risk profiles and capital adequacy; 3) Market discipline through disclosure and transparency. Implementing Basel II poses challenges for Indian banks like additional capital requirements and favoring large banks with stronger risk management.
Basel I, II, and III are agreements that established regulatory standards for bank capital adequacy. Basel I, established in 1988, focused on credit risk and set minimum capital requirements of 8% of risk-weighted assets. Basel II, released in 2004, included three pillars: Pillar I established a revised minimum capital framework; Pillar II covered supervisory review; and Pillar III addressed market discipline through disclosure. It recommended a minimum ratio of total capital to risk-weighted assets of 8% and prescribed the minimum capital adequacy ratio of 9% for India. Basel III, finalized in 2017, strengthened bank capital requirements in response to the 2008 financial crisis.
The document discusses the Basel Committee on Banking Supervision and the Basel Accords. It provides background on the BIS and establishes that the Basel Committee published Basel I in 1988 to establish minimum capital requirements for banks. Basel I focused on credit risk and classified assets into risk weight categories. It aimed to strengthen stability in international banking and decrease competitive inequality. However, Basel I had limitations like simplistic risk differentiation and a static view of default risk. This led to the development of Basel II.
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2. Introduction
The need for banking regulation conceives its roots in the concern
towards the socio-economic costs that arise in case of breakdown of the
banking system or that of bank failures and systemic crises.
So as a result, the major aim of banking industry regulation is to
maintain financial stability to ensure a safe and sound banking system to
protect the interest of depositors in particular and to promote a healthy
investment environment in general.
The banking industry is one of the major key areas responsible for the
economic growth of a nation, but, with the globalization of the same,
there comes a phenomenon of sequential prostration calling for the
implementation of minimum global banking regulation standards to
avoid cross country impact of banking disruptions or crises.
3. Basel 1 2 and 3 is that Basel 1 is established to specify a minimum
ratio of capital to risk-weighted assets for the banks whereas Basel 2
is established to introduce supervisory responsibilities and to further
strengthen the minimum capital requirement and Basel 3 to promote
the need for liquidity buffers (an additional layer of equity).
4. Basel Committee - 1974
The central bank governors of the G10 countries established a
Committee on Banking Regulations and Supervisory Practices.
The group of ten countries consist of Belgium, Canada, France,
Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom
and the United States, Switzerland was also included as part of the
group.
Later renamed as the Basel Committee on Banking
Supervision(BCBS).
The Basel Committee on Banking Supervision provides a forum for
regular cooperation on banking supervisory matters.
Its mandate is to strengthen the regulation, supervision and
practices of banks worldwide with the purpose of enhancing
financial stability.
5. Basel Committee on Banking Supervision (BCBS) came into being under the
patronage of Bank for International Settlements (BIS), Basel, Switzerland.
The Committee formulates guidelines and provides recommendations on
banking regulation based on capital risk, market risk and operational risk.
Currently there are 27 member nations in the committee.
Basel guidelines refer to broad supervisory standards formulated by this group of
central banks- called the Basel Committee on Banking Supervision (BCBS).
The set of agreement by the BCBS, which mainly focuses on risks to banks and
the financial system are called Basel accord.
The purpose of the accord is to ensure that financial institutions have enough
capital on account to meet obligations and absorb unexpected losses. India has
accepted Basel accords for the banking system.
6. Credit Risk - Credit risk is most simply defined as the potential that a
bank’s borrower or counterparty may fail to meet its obligations in
accordance with agreed terms.
Market Risk - Market risk refers to the risk to a bank resulting from
movements in market prices in particular changes in interest rates,
foreign exchange rates and equity and commodity prices.
7. BASEL I
Risk management (Focused on Credit Risk, No recognition of
operational risk)
Capital adequacy, sound supervision and regulation
Transparency of operations
Unquestionably accepted by developed and developing countries
Capital requirement 8% of assets (banks were advised to maintain capital
equal to a minimum 8% of a basket of assets measured based on the basis
of their risk)
Tier 1 capital at 4%
Tier 2 capital at 4%
8. Capital Adequacy Framework
A bank should have sufficient capital to provide a stable resource to
absorb any losses arising from the risks in its business.
Capital is divided into tiers according to the characteristics/qualities
of each qualifying instrument.
For supervisory purposes capital is split into two categories: Tier I
and Tier II.
9. Tier I capital -Share capital and disclosed reserves and it is a bank’s
highest quality capital because it is fully available to cover losses.
Tier II capital on the other hand consists of certain reserves and
certain types of subordinated debt.
The loss absorption capacity of Tier II capital is lower than that of Tier I
capital.
10. The twin objectives of Basel I were:
(a) to ensure an adequate level of capital in the international
banking system &
(b) to create a more level playing field in the competitive
environment.
E.g. The accord specified guidelines on how to recognize the
effects of multilateral netting (an agreement between two or more
banks to settle a number of transactions together as it is cost
effective and time-saving as opposed to settling them individually)
in April 1995.
11. BASEL II – The New Capital Farmework
In June 1999, the Committee issued a proposal for a new capital
adequacy framework to replace the 1988 Accord.
This led to the release of the Revised Capital Framework in June
2004. Generally known as ‟Basel II”,
The New Basel Capital Accord focused on, three pillars viz.
Pillar I - Minimum capital requirement
Pillar II - Supervisory review
Pillar III - Market discipline
12.
13. Pillar I - Minimum Capital
Requirement
The Committee on Banking Supervision recommended the target
standard ratio of capital to Risk Weighted Assets should be at least 8%
(of which the core capital element would be at least 4%).
The minimum capital adequacy ratio of 8% was prescribed taking into
account the credit risk.
However, in India the Reserve Bank of India has prescribed the
minimum capital adequacy ratio of 9% of Risk Weighted Assets.
14. Pillar II - Supervisory Review
The Supervisory review should be carried out in the
following manner.
Banks should have a process for assessing their overall
capital adequacy
Supervisors should review banks’ assessments
Banks are expected to operate above minimum
Supervisor’s intervention if capital is not sufficient
15. Pillar III: Market Discipline
Role of the market in evaluating the adequacy of bank capital
Streamlined catalogue of disclosure requirements
Close coordination with International Accounting Standards Board
In principle, disclosure of data on semiannual basis
The new framework was designed with the intention of improving the
way regulatory capital requirements reflect underlying risks and to better
address the financial innovation that had occurred in recent years. The
changes aimed at rewarding and encouraging continued improvements
in risk measurement and control.
16. Basel III Accords:
The global financial crises of 2008, triggered by the Lehman Brothers’ collapse, set
alarm bells ringing for financial institutions.
The Basel III framework is designed to make the banking sector more efficient. Basel III
is a comprehensive set of reform measures which are designed & developed by the
Basel Committee on Banking Supervision with the aim to strengthen the regulation,
supervision and risk management of the banking sector (BCBS).
The norms call for improvement of the quantity and quality of capital of banks,
stronger supervision, and more stringent risk management and disclosure standards.
Therefore, in December 2010, the Basel Committee on Banking Supervision (BCBS)
released a comprehensive reform package entitled– “Basel–III: A Global Regulatory
Framework for More Resilient Banks and Banking System” with following two principal
objectives:
1) To strengthen global capital and liquidity regulations with the goal of promoting a more
resilient banking sector.
2) To improve the banking sectors stability to absorb shock arising from financial and
economic stress, which, in turn would reduce the risk of a spillover from the financial
sector to the real economy.
17. Implementation of Basel III in India
The Basel III accords are to be implemented in India in a phase-wise manner from April 1,
2013 to March 31, 2019 in the light of the guidelines issued by Reserve Bank of India in
May 2012 with an aim to attain sustainability on micro as well as on macro level.
Basel III reforms are aimed at strengthening the regulatory norms at bank-level or we can
say the micro prudential regulation, with the intention to raise the resilience of individual
banking institutions in periods of stress.
In addition to this, the reforms also have a mmacroprudentialfocus as they are likely to
address the system wide risks which can build up across the banking sector along with the
the pro-cyclical amplification of these risks over time (RBI 2015).
The Basel III Capital Regulations guidelines issued by RBI have six constituents:
1) Minimum Capital Requirements
2) Supervisory Review and Evaluation Process
3) Market Discipline
4) Capital Conservation Buffer Framework
5) Leverage Ratio Framework
6) Countercyclical Capital Buffer Framework
18. Moreover, the guidelines on “Liquidity Risk Management by Banks”
were issued by RBI circular along with two minimum standards viz.;
Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) for
funding liquidity were prescribed. Additionally, a set of five tools to be
used for monitoring the liquidity risk exposures of banks was also
prescribed which are as follows:
1) Contractual Maturity Mismatch
2)Concentration of Funding
3) Available Unencumbered Assets
4) Liquidity Coverage Ratio by Significant Currency
5) Market-related Monitoring Tools
19. Basel 1 vs 2 vs 3
Basel 1
Basel 1 was formed with the main objective of enumerating a
minimum capital requirement for banks.
Basel 2
Basel 2 was established to introduce supervisory responsibilities
and to further strengthen the minimum capital requirement.
Basel 3
Focus of Basel 3 was to specify an additional buffer of equity to
be maintained by banks.
Risk Focus
Basel 1 Basel 1 has the minimal risk focus out of the 3 accords.
Basel 2 Basel 2 introduced a 3 pillar approach to risk management.
Basel 3
Assessment of liquidity risk in addition to the risks set out in
Basel 2 was introduced by Basel 3.
Risks Considered
Basel 1 Only credit risk is considered in Basel 1.
Basel 2
Basel 2 includes a wide range of risks including operational,
strategic and reputational risks.
Basel 3
Basel 3 includes liquidity risks in addition to the risks introduced
by Basel 2.
Predictability of Future Risks
Basel 1
Basel 1 is backward-looking as it only considered the assets in
the current portfolio of banks.
Basel 2
Basel 2 is forward-looking compared to Basel 1 since the capital
calculation is risk-sensitive.
Basel 3
Basel 3 is forward looking as macroeconomic environmental
factors are considered in addition to the individual bank criteria.
Difference between Basel 1 2 and 3
20. Conclusion
The difference between Basel 1 2 and 3 accords are mainly due to the
differences between their objectives with which they were established to
achieve.
Even though they are widely different in the standards and requirements
they presented, all 3 are navigated in such a way to manage banking
risks in light of the swiftly changing international business environments.
With the advancements in globalization, banks are interrelated
everywhere in the world. If banks take uncalculated risks, disastrous
situations can arise due to the massive amount of funds involved and the
negative impact can be soon dispersed among many nations.
The financial crisis that started on 2008 that caused a substantial
economic loss is the timeliest example of this.