Ppt of basel 2 norms 2013

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Ppt of basel 2 norms 2013

  1. 1. BASEL II NORMS
  2. 2. Basel History About Basel I About Basel II  Introduction  Definition  Three Pillar Approach  Advantages & Drawbacks  Basel I Vs Basel II Challenges and issues Implication.
  3. 3. INTRODUCTION OF BASEL • Basel is a city in Switzerland which is also the headquarters of Bureau of International Settlement (BIS). • BIS’s common goal: financial stability  common standards • BIS have 27 member nations in the committee.
  4. 4. Contd… • Basel guidelines refer to broad supervisory standards formulated by this group of central banks- called the Basel Committee on Banking Supervision (BCBS).
  5. 5. BASEL ACCORD The BCBS focuses on risks to banks and the financial system are called Basel accord. Purpose: • 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. 6. BASEL I • In 1988, BCBS introduced capital measurement system called Basel capital accord, also called as Basel I. • It focused almost entirely on credit risk. It defined capital and structure of risk weights for banks. • 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.
  7. 7. BASEL II 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 main areas: risks supervisory review market discipline.
  8. 8. OBJECTIVE OF BASEL II • Ensuring that capital allocation is more risk sensitive • Separating operational risk from credit risk, and quantifying both • Attempting to align economic and regulatory capital more closely to reduce scope for regulatory arbitrage
  9. 9. Three Pillars of Basel II Framework
  10. 10. Pillar 1 : Minimum capital requirements 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 RISKS:
  11. 11. 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 management system.
  12. 12. 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
  13. 13. Advantages.. 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 systems. 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.
  14. 14. Drawbacks… Dealing with diversity. Lack of data on internal ratings and modeling. Credit risk reduction. Cyclical fluctuations in bank lending. Competition among banks. Financial innovations.
  15. 15. 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.
  16. 16. ISSUES AND CHALLENGES • Capital Requirement • Profitability • Risk Management Architecture • Choice of Alternative Approaches: • Absence of Historical Database • Incentive to Remain Unrated • Supervisory Framework • Corporate Governance Issues • National Discretion • Disclosure Regime:
  17. 17. Implications.. • 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 used. • 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- lenders. • This was designed for the big banks in the BCBS member countries, not for smaller or less developed economies
  18. 18. CONTD…. • 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.

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