What are Basel banking norms?
Around 10 public sector banks (PSBs) will get a total capital infusion of Rs 12,517 crore from the government before this financial year ends. This is to enable a step-up of lending at this time of slowing economic growth, as well as meeting the capital adequacy norms. In the light of this development here is a short primer on Basel banking norms. Basel is a city in Switzerland which is also the headquarters of Bureau of International Settlement (BIS). BIS fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations. Currently there are 27 member nations in the committee. Basel guidelines refer to broad supervisory standards formulated by this group of central banks- called the Basel Committee on Banking Supervision (BCBS). The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial system are called Basel accord. The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses. India has accepted Basel accords for the banking system. Basel I In 1988, BCBS introduced capital measurement system called Basel capital accord, also called as Basel 1. It focused almost entirely on credit risk. It defined capital and structure of risk weights for banks. The minimum capital requirement was fixed at 8% of risk weighted assets (RWA). RWA means assets with different risk profiles. For example, an asset backed by collateral would carry lesser risks as compared to personal loans, which have no collateral. India adopted Basel 1 guidelines in 1999. Basel II In 2004, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord. The guidelines were based on three parameters. Banks should maintain a minimum capital adequacy requirement of 8% of risk assets, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that is credit and increased disclosure requirements. Banks need to mandatorily disclose their risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented.
The accord in operation
Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline. The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.
The first pillar[edit source | editbeta]
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. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB, Advanced IRB and General IB2 Restriction. IRB stands for "Internal Rating-Based Approach".
A need was felt to further strengthen the system as banks in the developed economies were under-capitalized. and rating agencies. It must be consistent with how the senior management. capital. It is the Internal Capital Adequacy Assessment Process (ICAAP) that is the result of Pillar II of Basel II accords. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements.For operational risk. Institutions are also required to create a formal policy on what will be disclosed and controls around them along with the validation and frequency of these disclosures.
The third pillar[edit source | editbeta]
This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution. Market discipline supplements regulation as sharing of information facilitates assessment of the bank by others. standardized approach or STA. These guidelines were introduced in response to the financial crisis of 2008. In the future there will be closer links between the concepts of economic and regulatory capital. risk assessment processes. Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive. Basel III guidelines were released. leverage. pension risk. other banks. analysts.
. The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. which the accord combines under the title of residual risk. risk exposures. including investors. which leads to good corporate governance. they are better able to distinguish between banking organizations so that they can reward those that manage their risks prudently and penalize those that do not. As the Basel II recommendations are phased in by the banking industry it will move from standardised requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. For market risk the preferred approach is VaR (value at risk). Banks can review their risk management system.
The second pillar[edit source | editbeta]
This is a regulatory response to the first pillar. It also provides a framework for dealing with systemic risk. and the capital adequacy of the institution. giving regulators better 'tools' over those previously available. concentration risk. over-leveraged and had a greater reliance on short-term funding. there are three different approaches – basic indicator approach or BIA. the disclosures under Pillar 3 apply to the top consolidated level of the banking group to which the Basel II framework applies. funding and liquidity. In general. When market participants have a sufficient understanding of a bank's activities and the controls it has in place to manage its exposures. and the internal measurement approach (an advanced form of which is the advanced measurement approach or AMA). customers. except qualitative disclosures providing a summary of the general risk management objectives and policies which can be made annually. strategic risk. These disclosures are required to be made at least twice a year.
Basel III In 2010. including the board. reputational risk. capital. assess and manage the risks of the institution. liquidity risk and legal risk. Also the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk. The aim of Pillar 3 is to allow market discipline to operate by requiring institutions to disclose details on the scope of application.
Basel III Accord .com/article/finance/what-are-basel-banking-norms113011100175_1. developed by the Basel Committee on Banking Supervision.Basel 3 Norms
What is Basel iii or What is Basel 3 Accord or Meaning and Definition of Basel III Accord:Basel III or Basel 3 released in December. Thus. supervision and risk management of the banking sector".business-standard.http://www. stress testing and market liquidity risk. In a nut shell we can say that Basel iii is the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Supervision) on bank capital adequacy. These accords deal with risk management aspects forthe banking sector. This latest Accord now seeks to improve the banking sector's ability to deal with financial and economic stress. improve risk management and strengthen the banks' transparency. and were less stringent) What does Basel III is all About ? According to Basel Committee on Banking Supervision "Basel III is a comprehensive set of reform measures. we can say that Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking Supervision to enhance the bankingregulatory framework under Basel I and Basel II. 2010 is the third in the series of Basel Accords.
What are the objectives / aims of the Basel III measures ? Basel 3 measures aim to:
→ improve the banking sector's ability to absorb shocks arising from financial and economic stress. whatever the source → improve risk management and governance
. to strengthen the regulation. (Basel I and Basel II are the earlier versions of the same.
is most likely must have heard about Three Pillars of Basel. only consolation for Indian banks is the fact that historically they have maintained their core and overall capital well in excess of the regulatory minimum. Expansion of capital to this extent will affect the returns on the equity of these banks specially public sector banks. by 2020 (The estimates vary from organisation to organisation). Three Pillar of Basel still stand under Basel 3. The framework enhances bank-specific measures and includes macro-prudential regulations to help create a more stable banking sector.e. Basel III has essentially been designed to address the weaknesses that become too obvious during the 2008 financial crisis world faced..•
→ strengthen banks' transparency and disclosures.00.
What are Three Pillars of Basel II Norms or What are the changes in Three Pillars of Basel iii Accord ?
Basel III: Three Pillars Still Standing :
Any one who has ever heard about Basel I and II.
The basic structure of Basel III remains unchanged with three mutually reinforcing pillars.
. Thus we can say that Basel III guidelines are aimed at to improve the ability of banks to withstand periods of economic and financial stress as the new guidelines are more stringent than the earlier requirements for capital and liquidity in the banking sector. The intent of the Basel Committee seems to prepare the banking industry for any future economic downturns.
How Does Basel III Requirements Will Affect Indian Banks : The Basel III which is to be implemented by banks in India as per the guidelines issued by RBI from time to time.000 crores in external capital in next nine years or so i. It is estimated that Indian banks will be required to rais Rs 6. will be challenging task not only for the banks but also for GOI. However.
(b) Capital Conservation Buffer: Another key feature of Basel iii is that now banks
will be required to hold a capital conservation buffer of 2. This in turn will mean that banks will be stronger. Pillar 3: Market Discipline : Increasing the disclosures that banks must provide to increase the transparency of banks
What are the Major Changes Proposed in Basel III over earlier Accords i. The countercyclical buffer has been introducted with the objective to increase capital requirements in good times and decrease the same in bad times.
. The buffer will slow banking activity when it overheats and will encourage lending when times are tough i.Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) : Maintaining capital calculated through credit. in bad times. The aim of asking to build conservation buffer is to ensure that banks maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress. Pillar 2 : Supervisory Review Process : Regulating tools and frameworks for dealing with peripheral risks that banks face. The buffer will range from 0% to 2. (c) Countercyclical Buffer: This is also one of the key elements of Basel III. market and operational risk areas.5%.5%. consisting of common equity or other fully loss-absorbing capital. Basel I and Basel II? What are the Major Features of Basel III ?
(a) Better Capital Quality : One of the key elements of Basel 3 is the introduction of much stricter definition of capital.e.e. allowing them to better withstand periods of stress. Better quality capital means the higher lossabsorbing capacity.
5% of total risk-weighted assets. will also increase from the current minimum of 4% to 6%. yet the required total capital will increase to 10. 3% leverage ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in January 2018. the highest form of loss-absorbing capital. A leverage ratio is the relative amount of capital to total assets (not risk-weighted). contingent capital and bail-in-debt.
Comparison of Capital Requirements under Basel II and Basel III : Under Base Under l II Basel III 8% 2% 10. The overall Tier 1 capital requirement. Options for implementation include capital surcharges. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are to be introduced in 2015 and 2018. consisting of not only common equity but also other qualifying financial instruments. (g) Systemically Important Financial Institutions (SIFI) : As part of the macroprudential framework. This aims to put a cap on swelling of leverage in the banking sector on a global basis.50% 4.(d) Minimum Common Equity and Tier 1 Capital Requirements : The minimum requirement for common equity. respectively. has been raised under Basel III from 2% to 4. a framework for liquidity risk management will be created. Thus. systemically important banks will be expected to have lossabsorbing capability beyond the Basel III requirements. (f) Liquidity Ratios: Under Basel III. now Basel III rules include a leverage ratio to serve as a safety net.5% when combined with the conservation buffer. (e) Leverage Ratio: A review of the financial crisis of 2008 has indicted that the value
of many assets fell quicker than assumed from historical experience.50% to
Requirements Minimum Ratio of Total Capital To RWAs Minimum Ratio of
. Although the minimum total capital requirement will remain at the current 8% level.
00% 0% to 2.50% 3. focused almost entirely on credit risk.00% 2. Basel II was introduced in 2004. risk management and disclosure requirements. disclosures and risk management within the banking sector.00% 4% 2% None None None None None 6.00% 5. laid down guidelines for capital adequacy.50% TBD (2015) TBD (2018) TBD (2011)
Core Tier I capital to RWAs Capital Conservation Buffers to RWAs Leverage Ratio Countercyclical Buffer Minimum Liquidity Coverage Ratio Minimum Net Stable Funding Ratio Systemically important Financial Institutions Charge
http://www. It defined capital requirement and structure of risk weights for banks. Q: What did Basel I and Basel II focus on? Basel I norms was introduced in 1998. It is a comprehensive set of reform measures designed to improve the regulation.Common RWAs Tier I RWAs
Equity to capital to
Q: What are Basel norms? Basel is a set of standards and practices developed for global banks to ensure that they maintain adequate capital to withstand periods of economic strain.
2018 for Indian banks. and focused more on individual financial institutions.Q: Why Basel III? It is widely felt that the shortcoming in Basel II norms is what led to the global financial crisis of 2008. while ignoring systemic risk. liquidity and capital management infrastructure. That is because Basel II did not have any explicit regulation on the debt that banks could take on their books. 2018 and March 31. particularly in the areas of stress testing. Q: What does Basel III norm stipulate? Basel III establishes tougher capital standards through more restrictive capital definitions. higher risk-weighted assets (RWA). in turn pushing up the cost of borrowing. Q: Why the earlier deadline for Indian banks?
. additional capital buffers and higher requirements for minimum capital ratios. The reforms could fundamentally impact profitability and require sweeping changes in the business models of many banks Q: What is the deadline for banks to become Basel III compliant? For international banks the deadline is December 31. Q: Why are many banks opposed to Basel III norms? Basel III norms will require banks to undertake significant process and system changes to make upgrades. and thereby further aggravating the slowdown. and that they don’t rely too much on short term funds. It also introduces new strict liquidity requirements. To ensure that banks don’t take on excessive debt. Basel III norms were proposed in 2010. This will leave banks with less money to lend. Q: What is the biggest criticism against Basel III? That the stringent capital requirements come at a time when the global economy is in the midst of a slowdown.
Also. Basel III requires higher and better quality capital. but that would have overshot the Basel III prescription by three months and would have attracted adverse notice. Admittedly. The average Return on Equity (RoE) of the Indian banking system for the last three years has been approximately 15%. Why then should Indian banks then comply with Basel III norms? The RBI said: India should transit to Basel III because of several reasons.moneycontrol. depending on to what extent the government will infuse capital in state-owned banks.000-1. anywhere between Rs 70. Implementation of Basel III is expected to result in a decline in Indian banks' RoE in the short-term. Something which is admitted by the RBI. Q: How much extra capital will Indian banks need for Basel III? According to RBI’s estimates.com/news/features/all-you-wanted-to-know-aboutbasel-norms_754578. we cannot afford to have a regulatory deviation from global standards. the cost of equity capital is high. of which Rs 1.
http://www. We could have gone up to March 31.75 lakh crore. it is important that Indian banks have the cushion afforded by improved risk management systems to withstand shocks from external systems. 2019.The RBI said that: We did this to align our date with the close of the Indian fiscal year. By far the most important reason is that as India integrates with the rest of the world.00.000 crore will have to raised through the market. Q: Why are Indian banks concerned about Basel III norms? Just like for international banks. especially as they deepen their links with the global financial system going forward. Within the Rs 1.html
. as increasingly Indian banks go abroad and foreign banks come on to our shores. Any deviation will hurt us both by way of perception and also in actual practice.75 lakh crore will have to be equity capital. which is March 31. Q: Indian banks are much better off than global banks that caused the financial crisis. Indian banks will require a capital of Rs 5 lakh crore over the next five years. Basel III norms will affect the profitability and return ratios of Indian banks as well.