Basel1 & 11

an international standard for

regulatory capital
requirements

Mohd.Mohsin,Assistant
Professor,IIUC,DC

Basel I an international standard for

regulatory capital requirements .Prior to
1988, there was no uniform international
regulatory standard for setting bank capital
requirements. In 1988, the
Basel Committee on Banking Supervision
developed the Basel Capital Accord (Basel I)
to align the capital adequacy requirements
applicable to internationally-active banks.

Mohd.Mohsin,Assistant
Professor,IIUC,DC

First, it defined what banks could hold as capital,

as well as designating capital as Tier 1 or Tier 2

The second key concept introduced in Basel I

was that capital should be held by banks in
relation to the risks that they face.
The major risks faced by banks relate to the
assets held on balance sheet. Thus, Basel I
calculated banks' minimum capital requirements
as a percentage of assets, which are adjusted for
their riski ness. to adjust assets for their
riskiness, risk weights are assigned to assets.

Mohd.Mohsin,Assistant
Professor,IIUC,DC

Basel I then sets banks minimum total

capital requirement.
a.) (tier 1 plus tier 2) to be at least 8 percent
of total risk weighted assets, with the
amount of Tier 2 capital limited to 100
percent of Tier 1.
b) A ratio of core capital to be at least 4
percent of total risk weighted assets

Mohd.Mohsin,Assistant
Professor,IIUC,DC

Basel II builds significantly on Basel I by

increasing the sensitivity of capital to key
bank risks. The Basel II framework
incorporates three complementary pillars
that draw on the range of approaches to
help ensure banks are adequately
capitalized.

Mohd.Mohsin,Assistant
Professor,IIUC,DC

Specifies how banks should determine the

capital requirements they should meet for
the major risks that they face. These risks
include credit risk, traded market risk,
securitization risk, and operational risk.

Mohd.Mohsin,Assistant
Professor,IIUC,DC

recognizes that banks are ultimately

responsible for managing their risks.
However, supervisors can play a role in
assessing banks risk management
practices, and ensure that the negative
externalities that can arise from the failure
Of a bank are minimized and managed.

Mohd.Mohsin,Assistant
Professor,IIUC,DC

recognizes the role played by market

participants in regulating bank behavior,
and promotes market discipline through the
use of disclosure requirements.

Mohd.Mohsin,Assistant
Professor,IIUC,DC

Tier 1 capital
Tier 1 capital called Core Capital comprises of
highest quality of capital elements that
consists of :
a) Paid up capital
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
Mohd.Mohsin,Assistant
Professor,IIUC,DC

Tier 2 capital called Supplementary Capital

represents other elements which fall shortof some of
the characteristics of the core capital but contribute
to the overall strength of a bank and consists of:
a) General provision
b) Revaluation reserves
Revaluation reserve for fixed assets
Revaluation reserve for securities
Revaluation reserve for equity instrument
c) All other preference shares
d)Exchange Equalization Account
E) Revaluation Reserve for Securities
f) Subordinated debt.

Mohd.Mohsin,Assistant
Professor,IIUC,DC

Tier 3 capital called Additional

Supplementary Capital, consists of shortterm
subordinated debt (original maturity less
than or equal to five years but greater than
or equal to two years) would be solely for
the purpose of meeting a proportion of the
capital requirements for market risk.

Mohd.Mohsin,Assistant
Professor,IIUC,DC

Minimum Capital Requirement

for Basel 11
(tier 1 plus tier 2 plus tier 3) to be at least
10 percent of total risk weighted assets,
with the amount of Tier 2 capital and Tier
3 capital limited to 100 percent of Tier 1.
b) A ratio of core capital to be at least 5
percent of total risk weighted assets
1.

Conditions For Maintaining

Regulatory Capital
a)

b)

c)

d)

Tier2 and 3 capital shall not exceed tier

capital 1.
50% asset revaluation reserve shall be
eligible for tier 2 capital.
50% revaluation reserve for securities
shall be eligible for tier 2 capital
Subordinated debt shall be limited to a
maximum 30% of tier 1 capital

Some Deduction from Tier 1

capital
I.
II.

III.

Book value of goodwill

Shortfall in provision required against
classified assets
remaining deficit on account of
revaluation of investment in securities