A presentation on……..

BASEL 1
Prepared by:
Palak & Ripal
 INTRODUCTION TO BASEL
COMMITTEE
A Group of eleven nations decided to
form a co-operative council to harmonize
banking standards and regulations
internationally within the member states.
Goal:
 Extend regulatory coverage.
 Promote adequate banking supervision.
 Strict supervision.
• It can not enact legally binding standards.
 DEFINITION
A set of international banking regulations
put forth by the Basel Committee on Bank
Supervision, which set out the minimum
capital requirements of financial
institutions with the goal of minimizing
credit risk. Banks that operate
internationally are required to maintain a
minimum amount (8%) of capital based
on a percent of risk-weighted assets
 SCOPE O BASEL 1
Created for G-10 which are developed
nations and not for emerging economies.
It only provides information on adequate
capital to guard against risk of
creditworthiness other areas such as
fluctuation in nation's currency,
macroeconomic downturn, interest rate
changes etc are not covered.
It only proposes minimum capital
requirement for internationally active banks.
FOUR PILLORS OF BASEL 1
1) The constituents of capital
FOUR PILLORS OF BASEL 1
2) Risk weighing
It divides bank’s assets into five categories
 0% - riskless
 20% - low risk
 50% - moderate risk
 100% - high risk
 variable depending on central bank’s
discretion
 0% - cash, central bank and government debt
and any OECD government debt
 0%, 10%, 20% or 50% - public sector debt
 20% - development bank debt, OECD bank
debt, OECD securities firm debt, non-OECD
bank debt (under one year maturity) and non-
OECD public sector debt, cash in collection
 50% - residential mortgages
 100% - private sector debt, non-OECD bank
debt (maturity over a year), real estate, plant
and equipment, capital instruments issued at
other banks
FOUR PILLORS OF BASEL 1
3) A target standard ratio
 It combines pillar 1 and pillar 2.
 It sets a universal standard whereby 8% of
a bank’s risk-weighted assets must be
covered by Tier 1 and Tier 2 capital
reserves.
 Tier 1 capital must cover 4% of a bank’s
risk-weighted assets.
FOUR PILLORS OF BASEL 1
4)Transitional and implementing
agreements
 sets the stage for the implementation of
the Basel Accords.
 Each country’s central bank is requested
to create strong surveillance and
enforcement mechanisms to ensure the
Basel Accords are followed
CRITICISMS:
Narrow scope.
Weak influence
Inability to publicize in lay-men’s terms.
Oversell of the terms of BASEL 1
Wide breath and absoluteness of BASEL
1’s risk weighing.
Application to emerging economies