2. Basel History Basel Committee was constituted by the Central
Bank Governors of the G-10 countries. The Committee's Secretariat
is located at the Bank for International Settlements in Basel,
Switzerland. Its objective is to enhance understanding of key
supervisory issues and quality improvement of banking supervision
worldwide. This committee is best known for its international
standards on capital adequacy; the core principles of banking
supervision and the concordat on cross-border banking
supervision.
3. HISTORY OF BASEL COMMITTIEES Basel I: the Basel Capital
Accord, introduced in 1988 and focuses on Capital adequacy of
financial institutions. Basel II: the New Capital Framework, issued
in 2004, focuses on following three main pillars Minimum capital
Standard [Minimum CAR ] Supervisory review and [Review by central
Bank RBI, on time to time] Market discipline, [Review by market,
stake holders, customer, share holder, gvt etc] Basel III: Basel
III released in December, 2010, (implementation till March 31,
2018)"Basel III" is a comprehensive set of reform measures in,
regulation, supervision & risk management of the banking
sector.
4. Basel I Basel I is the round of deliberations by central
bankers from around the world, and in 1988, the Basel committee
(BCBS) in Basel, Switzerland, published a set of minimal capital
requirements for banks. It primarily focused on credit risk . 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.
5. 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. The
objective of Basel II is to create an international standard that
banking regulators can use when creating regulations about how much
capital banks need to put aside to guard against the types of
financial and operational risks banks face. Basel II includes
recommendations on three main areas: risks, supervisory review, and
market discipline.
6. The Accord in operation The 3 Pillar Approach Minimum
Capital Requirements Supervisory Review Market Discipline &
Disclosure
7. The First Pillar.. 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.
8. The Second Pillar.. 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.
9. The Third Pillar.. 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.
10. 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.
11. WHY BASEL-III ? Because of the global financial crisis
which begin 2008 because of, liquidity risk Excess credit growth.
Failures of Basel II being Inability to strengthen financial
stability Insufficient capital reserve Global financial crisis in
spite of Basel I & Basel II Responding to these risk factors,
the Basel Committee did following major reforms in BASEL-III:
Increase the quality and quantity capital Introduce Leverage ratio
Improve liquidity rules
12. OBJECTIVES OF BASEL-III To improve quality of capital To
improve liquidity of assets To bring further transparency and
market discipline under Pillar III. To improve the banking sector's
ability to deal with financial and economic stress, To Improving
banking sectors ability to absorb shocks (by creating capital
buffer) To optimizing the leverage through Leverage Ratio To reduce
risk spillover to the real economy
13. Three pillars of BASEL-II still standing in BASEL-III
Pillar-1: Capital Requirement: Minimum capital required based on
Risk Weighted Assets (RWAs). Pillar-2: Supervisory Review: Whether
Bank is maintaining proper capital or not, that aspect will be
reviewed time to time by central bank (RBI) in India Pillar-3:
Market Discipline: Pillar 3 is designed to increase the
transparency in banking system
14. The Impact of Basel III Impact on economy: IIF study: (IIF)
calculated that the economies of G3 (US, Euro Area and Japan) would
be 3% smaller after implementation of Basel-III till 2015. Basel
Committee study: 0.2% Impact on GDP each year for 4 years Global
banks could have a gap of liquid assets of 1,730 billion in four
years Global big banks could have a capital shortfall of 577
billion to meet 7% common equity norm However, long term gains will
be immense
15. Challenges with Indian Banking Industry.. With the feature
of additional capital requirements, the overall capital level of
the banks will see an increase. But, the banks that will not be
able to make it as per the norms may be left out of the global
system. Another biggest challenge is re-structuring the assets of
some of the banks would be a tedious process. The new norms seem to
favor the large banks that have better risk management and
measurement expertise, who also have better capital adequacy ratios
and geographically diversified portfolios.
16. 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.
17. CONCLUSION Imposing economic loss and emotional pain on
hundreds of millions and billions of people because of the crisis
which arise due to improper regulation, deregulation, and lake of
supervision, It is worthwhile to give up a little economic growth
in the average year in order to avoid these major impacts,
