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Basel Accords
Introduction
• Basel is a city in Switzerland which is also the
headquarters of Bureau of International
Settlement (BIS).
...
Basel Accords
• The set of agreement by the BCBS, which
mainly focuses on risks to banks and the
financial system are call...
• The BCBS does not have the authority to enforce
recommendations, although most member
countries as well as some other co...
Basel I
• In 1988, BCBS introduced capital
measurement system called Basel capital
accord, also called as Basel 1.
• It fo...
• An asset backed by collateral would carry lesser risks as
compared to personal loans, which have no collateral.
• Assets...
Basel II
• In 2004, Basel II guidelines were published by
BCBS, which were considered to be the refined
and reformed versi...
Basel III
• In 2010, Basel III guidelines were released. These
guidelines were introduced in response to the
financial cri...
Objectives / aims of the Basel III
• improve the banking sector's ability to absorb
shocks arising from financial and econ...
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Basel accords

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Basel accords

  1. 1. Basel Accords
  2. 2. Introduction • Basel is a city in Switzerland which is also the headquarters of Bureau of International Settlement (BIS). • BIS fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations. • Basel guidelines refer to broad supervisory standards formulated by this group of central banks- called the Basel Committee on Banking Supervision (BCBS).
  3. 3. Basel Accords • 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.
  4. 4. • The BCBS does not have the authority to enforce recommendations, although most member countries as well as some other countries tend to implement the Committee's policies. • This means that recommendations are enforced through national (or EU-wide) laws and regulations, rather than as a result of the committee's recommendations. • Thus some time may pass between recommendations and implementation as law at the national level.
  5. 5. Basel I • In 1988, BCBS introduced capital measurement system called Basel capital accord, also called as Basel 1. • 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). RWA means assets with different risk profiles.
  6. 6. • An asset backed by collateral would carry lesser risks as compared to personal loans, which have no collateral. • Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of 0% (for example cash, home country debt like Treasuries), 20% (securitizations such as MBS rated AAA) 50%, 100% (for example, most corporate debt), and some assets given No Rating. • Banks with an international presence are required to hold capital equal to 8% of their risk-weighted assets. • India adopted Basel 1 guidelines in 1999.
  7. 7. Basel II • In 2004, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord. • The guidelines were based on three parameters. i. Banks should maintain a minimum capital adequacy requirement of 8% of risk assets. ii. Banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks. iii. Banks need to mandatorily disclose their risk exposure, etc to the central bank.
  8. 8. Basel III • In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008. • A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding. • Also the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk.
  9. 9. Objectives / aims of the Basel III • improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source • improve risk management and governance • strengthen banks' transparency and disclosures. • Basel III guidelines are aimed at to improve the ability of banks to withstand periods of economic and financial stress as the new guidelines are more stringent than the earlier requirements for capital and liquidity in the banking sector.

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