March 31, 2020

Basel Norms and Basel Committee

Basel Committee and Basel Norms
Basel Committee on Bank of International Settlement: It is a committee of banks supervisors consisting of representatives from each of the most developed  countries. The committee is a forum for discussion on the handling of specific supervisory problems. It coordinates the sharing of supervisory responsibilities among national authorities in respect of banks' foreign establishments. The purpose is to ensure  effective supervision of banks' activities worldwide.                                             
In 1988 the Basel committee on banking supervision introduced the Basel-I accord or the risk based capital requirements to deal with the weakness in the leverage ratio as a measure for solvency. It was the first attempt to introduced the concept of minimum standards of capital adequacy. Number of members of Bank of international settlement committee is 55. Basel Norms is related to Capital Adequacy and Risk management. Basel Norms are followed by banks in India in order to comply with international best practices. This enables banks to be judged in comparison to other banks with respect to their work practices and strength.

Basel-I:Basel-I addressed only one Credit Risk, Basel-I introduced in 1988, Basel-I Capital adequate ratio target was 9%,

Basel-II Norms:Unfortunately India could not fully implement this but it is now gearing up under the guidance from the RBI to implement it from 1st April 2009.Basel-II Addresses 3 major Pillars Risks- Credit Risk-60%,Market Risk-25% and Operational Risk-15%,Minimum Capital to be maintained by banks under Basel-II is 8%,                                                           
  Credit Risk: it is basically the risk of loss,arising when a borrower back the loan as promised such borrowers are also known as subprime borrowers.     

Market Risk: Market risk is the risk that the value of an asset will decrease due to changes in market factors for Banks,market risk is a risk that the value of on or off balance sheet positions will be adversely affected by movements in equity and interest rate markets,currency exchange rates and commodity prices- it also called "systematic risk" because it relates to factors such as a recession that impact the entire market.                                                    
Operational Risk: Operational risk is the prospect of loss resulting from inadequate or failed procedures, systems or policies, Employees errors, system failures,fraud or other criminal activity any event that disrupts businesses processes.

Basel-III:Basel-III norms are effective from 1st January 2013. RBI extended the timeline for full implementation of Basel-III norms to 31 march 2019 instead of 31 March 2018. Basel-III Proposes may new capital, leverage and liquidity standards to strengthen the regulation supervision and risk management of the banking sector.Basel-III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. The measure aim to strengthen the regulation supervision and risk management of banks. Basel-III Capital adequacy ratio is 9%, Basel-III has three Pillars which is related to Basel-II Pillar(I)-Minimum Capital requirements (ii) Supervisory Capital Requirements, (iii) Market Discipline and Disclosures. Pillar(I) devided into two parts- Tire-1 and Tire-2 Tire-1 has also two parts- Common Equity tire-1 and Additional tire-1. Tire- also called going concern and Tire -2 called gone concern. Pillar(iii) implemented in 1 July 2013. 

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