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Basel Norms: Basel Is A City in Switzerland Which Is Also The Headquarters of Bureau of
Basel Norms: Basel Is A City in Switzerland Which Is Also The Headquarters of Bureau of
Introduction
Basel is a city in Switzerland which is also the headquarters of Bureau of
International Settlement (BIS).
Objective
o The set of the agreement by the BCBS (BASEL COMMITTEE ON
BANKING SUPERVISION), which mainly focuses on risks to banks and
the financial system are called Basel accord.
o The purpose of the accord is to ensure that financial institutions have enough
capital on account to meet the obligations and absorb unexpected losses.
o India has accepted Basel accords for the banking system.
o BASEL ACCORD has given us three BASEL NORMS which are BASEL
1,2 and 3.
Before coming to that we have to understand following terms-
Assets of banks were classified and grouped into 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 are given no rating India adopted Basel 1 guidelines in 1999.
BASEL-I
o In 1988, The Basel Committee on Banking Supervision (BCBS) introduced
capital measurement system called Basel capital accord, also called as Basel
1.
o It focused almost entirely on credit risk, It defined capital and structure of
risk weights for banks.
o The minimum capital requirement was fixed at 8% of risk-weighted assets
(RWA).
o India adopted Basel 1 guidelines in 1999.
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.
o Banks were needed to develop and use better risk management techniques in
monitoring and managing all the three types of risks that is credit and
increased disclosure requirements.
o The three types of risk are- operational risk, market risk, capital risk.
o Banks need to mandatory disclose their risk exposure, etc to the central
bank.
The three pillars of BASEL-2 can be understood from the following figure
The first pillar: Minimum capital requirements
The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that
a bank faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at
this stage.
The Internal Capital Adequacy Assessment Process (ICAAP) is a result of Pillar 2 of Basel II accords.
BASEL-3
Basel III
o In 2010, Basel III guidelines were released. These guidelines were
introduced in response to the financial crisis of 2008.
o In 2008, Lehman Brothers collapsed in September 2008, the need for a
fundamental strengthening of the Basel II framework had become apparent.
o Basel III norms aim at making most banking activities such as their trading
book activities more capital-intensive.
o The guidelines aim to promote a more resilient banking system by focusing
on four vital banking parameters viz. capital, leverage, funding and liquidity.
o Presently Indian banking system follows Basel II norms.
o The Reserve Bank of India has extended the timeline for full implementation
of the Basel III capital regulations by a year to March 31, 2019.
Important Points Regarding Implementation of Basel III
o The government of India is scaling disinvesting their holdings in PSBs to 52
per cent.
o The government will soon infuse Rs 6,990 crore in nine public sector banks
including SBI, Bank of Baroda (BoB), Punjab National Bank (PNB) for
enhancing their capital and meeting global risk norms.
o This is the first tranche of capital infusion for which the government had
allocated Rs 11,200 crore in the Budget for 2014-15.
o The government has infused Rs 58,600 crore between 2011 to 2014 in the
state-owned banks.
o Finance Minister Arun Jaitley in the Budget speech had said that "to be in
line with Basel-III norms there is a requirement to infuse Rs 2,40,000 crore
as equity by 2018 in our banks. To meet this huge capital requirement we
need to raise additional resources to fulfil this obligation.