Basel Norms

BASEL NORMS IN
BANKING INDUSTRY
WHAT IS MEANT BY BASEL NORMS OR BASEL
ACCORDS?
 Basel norms are international banking regulations issued by

the Basel Committee on Banking Supervision (BCBS).
 The Basel norms is an effort to coordinate banking
regulations across the globe, with the goal of strengthening
the international banking system.
 The Basel Committee on Banking Supervision (BCBS) consists
of representatives from central banks and regulatory
authorities of 27 countries (including India).
 Its secretariat (administrative office) is located at the Bank of
International Settlements (BIS) headquartered in the city of
Basel in Switzerland. Hence, the name Basel norms.
 The Basel Committee has issued three sets of regulations as
of 2018 known as Basel-I, II, and III.
BASEL-I
 Basel-1 was introduced in the year 1988. It

focused primarily on credit (default) risk
faced by the banks.
 As per Basel-1, all banks were required to
maintain a capital adequacy ratio of 8 %.

 The capital adequacy ratio is the minimum
capital requirement of a bank and is defined

as the ratio of capital to risk-weighted assets.
Continue..
 The capital was classified into Tier 1 and Tier 2
capital.
 Tier 1 capital is the core capital of a bank that is
permanent and reliable. It includes equity capital
and disclosed reserves.
 Tier 2 capital is the supplementary capital. It
includes undisclosed reserves, general provisions,
provisions against Non-performing Assets,
cumulative non-redeemable preference shares,
etc.
 The risk-weighted asset is the bank’s assets
weighted according to risks.
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 The assets of the bank were classified into 5 risk
categories of 0 % or 0, 10 % or 0.1, 20 % or 0.2, 50 %
or 0.5 and 100 % or 1. Example- cash into 0 % risk
category, home mortgage into 20 % risk category and
corporate debt into 100 % risk category.
 Lets say- a bank has Rs.100 as cash reserves, Rs.200
as home mortgage and Rs.300 as loans given out to
companies. The risk-weighted assets= (Rs.100 * 0 ) +
(Rs.200 * o.2) + (Rs.300 * 1) = 0 + 40 + 300 = Rs340
 Therefore, this bank has to maintain 8 % of Rs.340 as
minimum capital. (at least 4 % in tier-1 capital)
 India adopted Basel-1 in 1999.
BASEL-II
 Basel-II was issued in 2004.
 This framework is based on three parameters.
 Minimum capital requirements: Banks should continue to
maintain a minimum capital adequacy requirement of 8% of
risk-weighted assets. However, the definition of capital
adequacy ratio was refined. Also, Basel-II divides the capital
into 3 tiers. Tier-3 capital includes short-term subordinated
loans. (subordinated loans means lower in the ranking. It is
repaid after other debts in case of bank liquidation.)
 Regulatory supervision: According to this, banks were
required to develop and use better risk management
techniques in monitoring and managing all the three types of
risks that a bank faces, viz. credit, market, and operational
risks
 Market Discipline: It increased disclosure requirements. Banks
need to mandatorily disclose their CAR, risk exposure, etc to
the central bank.
 Presently India follows Basel-II norms.
BASEL-III
 The financial crisis of 2007-08 revealed shortcomings in the

Basel norms. Therefore, the previous accords were strengthened.
 Basel-III was first issued in late 2009. The guidelines aim to
promote a more resilient banking system.
 Capital: The capital adequacy ratio is to be maintained at 12.9 %.
The minimum Tier 1 capital ratio and the minimum Tier 2 capital
ratio have to be maintained at 10.5 % and 2 % of risk-weighted
assets respectively.
 In addition, banks have to maintain a capital conservation
buffer of 2.5%.
 Counter-cyclical buffer is also to be maintained at 0-2.5%.
 The leverage rate has to be at least 3 %. The leverage rate is the
ratio of a bank’s tier-1 capital to average total consolidated
assets.
Continue….
 Liquidity: Basel-III created two liquidity ratios: LCR and NSFR.
The liquidity coverage ratio(LCR) will require banks to hold
a buffer of high-quality liquid assets sufficient to deal with
the cash outflows encountered in an acute short term
stress scenario as specified by supervisors. The minimum
LCR requirement will be to reach 100% on 1 January 2019.
This is to prevent situations like “Bank Run”. The goal is to
ensure that banks have enough liquidity for a 30-days stress
scenario if it were to happen. On the other hand, the Net
Stable Funds Rate (NSFR) requires banks to maintain a stable
funding profile in relation to their off-balance-sheet assets
and activities. NSFR requires banks to fund their activities
with stable sources of finance (reliable over the one-year
horizon). The minimum NSFR requirement is 100 %.
Therefore, LCR measures short-term (30 days) resilience, and
NSFR measures medium-term (1 year) resilience.
 The deadline for the implementation of Basel-III was March
2019 in India. It was postponed to March 2020.
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Basel Norms

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Basel Norms

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BASEL NORMS IN

 Basel norms are international banking regulations issued by

 Basel-1 was introduced in the year 1988. It

maintain a capital adequacy ratio of 8 %.

capital requirement of a bank and is defined

 The financial crisis of 2007-08 revealed shortcomings in the

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