About Basel I
About Basel II
Three Pillar Approach
Advantages & Drawbacks
Basel I Vs Basel II
Challenges and issues
INTRODUCTION OF BASEL
• Basel is a city in Switzerland which is also the
headquarters of Bureau of International
• BIS’s common goal:
• BIS have 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 BCBS focuses on risks to banks and the
financial system are called Basel accord.
• 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
• In 1988, BCBS introduced capital measurement
system called Basel capital accord, also called as
• It focused almost entirely on credit risk. It
defined capital and structure of risk weights for
• The minimum capital requirement was fixed at
8% of risk weighted assets (RWA).
• Basel I is now widely viewed as outmoded, and
a more comprehensive set of guidelines, known
as Basel II are in the process of implementation
by several countries.
Basel II is a type of recommendations on
banking laws and regulations issued by the
Basel Committee on Banking Supervision that
was initially published in June 2004.
Basel II includes recommendations on three
OBJECTIVE OF BASEL II
• Ensuring that capital allocation is more risk
• Separating operational risk from credit risk,
and quantifying both
• Attempting to align economic and regulatory
capital more closely to reduce scope for
Pillar 1 : Minimum capital
Institution's total regulatory capital must be at
least 8% (ratio same as in Basel I) of its risk
• weighted assets, based on measures of THREE
Pillar 2 : Supervisory Review
• The second pillar deals with the regulatory response
to the first pillar, giving regulators much improved
'tools' over those available to them under Basel I.
• It also provides a framework for dealing with all the
other risks a bank may face, such as systemic risk,
pension risk, concentration risk, strategic risk,
reputation risk, liquidity risk and legal risk, which
the accord combines under the title of residual risk.
• It gives bank a power to review their risk
Pillar 3 : Market Discipline
• The third pillar greatly increases the disclosures
that the bank must make.
• This is designed to allow the market to have a
better picture of the overall risk position of the
bank and to allow the counterparties of the bank
to price and deal appropriately
Takes global aspect into consideration for more rational
decision making, improving the decision matrix for banks.
Makes better business standards.
Reduces losses to the banks.
Improving overall efficiency of banking and finance
Allowing capital allocation based on ratings of the
borrower making capital more risk-sensitive.
Provides range of alternatives to choose from.
Incorporates sensitivity to banks.
Encouraging mergers and acquisitions and more
collaboration on the part of the banks, this ultimately leads
to proper control over their capital and assets.
Dealing with diversity.
Lack of data on internal ratings and modeling.
Credit risk reduction.
Cyclical fluctuations in bank lending.
Competition among banks.
Basel I VS Basel II
• Basel I is very simplistic in its approach
towards credit risks. It does not distinguish
between collateralized and non-collateralized
loans, while Basel II tries to ensure that the
anomalies existed in Basel I are corrected.
ISSUES AND CHALLENGES
• Capital Requirement
• Risk Management Architecture
• Choice of Alternative Approaches:
• Absence of Historical Database
• Incentive to Remain Unrated
• Supervisory Framework
• Corporate Governance Issues
• National Discretion
• Disclosure Regime:
• The Basel Committee on Banking Supervision is a
Guideline for Computing Capital for Incremental Risk.
• It is a new way of managing risk and asset-liability
mismatches, like asset securitization, which unlocks
resources and spreads risk, are likely to be increasingly
• The major challenge the country's financial system faces
today is to bring informal loans into the formal financial
system. By implementing Basel II norms, our formal
banking system can learn many lessons from money-
• This was designed for the big banks in the BCBS member
countries, not for smaller or less developed economies
• Keeping in view the cost of compliance for both banks and
supervisors, the regulatory challenge would be to migrate to
Basel II in a non-disruptive manner.
• India is one of the early countries which subjected itself
voluntarily to the FSAP of the IMF, and our system was
assessed to be in high compliance with the relevant principles.
• With the gradual and purposeful implementation of the
banking sector reforms over the past decade, the Indian
banking system has shown significant improvement on
various parameters, has become robust and displayed ample
resilience to shocks in the economy.
• There is, therefore, ample evidence of the capacity of the Indian
banking system to migrate smoothly to Basel II.