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The Bank for International Settlements (BIS

):

Features:

 It is an international organization of central banks which promotes international monetary
and financial cooperation and serves as a bank for central banks.
 It coordinates regulations pertaining to financial services.
 It promotes international financial stability.
 It is not accountable to any national government.
 It provides banking services only to central banks helping with management of foreign
currency reserves of the central banks. It also provides emergency financial assistance to
the central banks.
 It is based in Basel, Switzerland, and was established under Hague agreements of 1930.
The BIS has 57 members.

Role / Objectives:

Central banks set monetary goals and intervene through the use of their financial resources in the
form of reserves and regulatory powers to achieve the monetary targets they set. The objectives
of the BIS is to make monetary policy more predictable and transparent among its member
central banks. While monetary is determined by each country individually, it is subject to
scrutiny of international institutions, speculators and analysts and their reactions have an impact
on the foreign exchange rates of the currency which is an important aspect of any monetary
policy. Two aspects of monetary policy which directly reflect the health and stability of the
financial system have been targeted by the BIS: to regulate capital adequacy of banks and make
reserves requirements transparent. The overall objective is to strengthen the International
Financial Architecture with specific focus on International Banking Supervision.

The primary objective of the BIS is to set capital adequacy requirements because from an
international point of view, speculative lending based on inadequate underlying capital and
inconsistent risk assessment strategies result in economic crises.

banks are required to set aside a proportion of their deposits as “reserve”. etc. As of march 31. . The BIS was originally owned by both governments and private individuals. at the Bretton Woods Conference in July.15 billion (SDR / USD 1. However the activities of a bank in totality include investments. History: The BIS was formed in 1930. foreign currencies. the BIS submits its accounts in terms of Special Drawing Rights (SDR’s). Towards achieving these goals the BIS provides a common platform for dialogue on supervisory issues to the concerned Central Banks. Thus banks are exposed to credit risk represented by possibility of loan default. Al such operations are subject to risks in terms of rate changes. Reserve policy is more difficult to standardize because it depends on domestic conditions prevailing in each nation. a research and statistical database to the participants and conducts seminars / workshops on the subject of financial stability. there was demand for liquidation of the BIS.To make banking operations safer for customers and reduce risk of technical insolvency. if any. 2007. but in recent years the BIS has bought back all shares held by private investors.5100) which is included 150 tons of fine gold. the bank had total assets of USD 409. trading in commodities. As a result. The interest rate differential between the two activities provides the buffer to adjust loan defaults. 1944. The decision to liquidate the BIS was officially reversed in 1948. The bank was originally intended to facilitate money transfers arising from settling obligations under the Versailles treaty. However. Operational deficiencies may also result in losses. Banking Supervision: Banking can be described as an activity involving accepting of deposits and giving loans on interest. Post World War II there were allegations that the BIS had acted inappropriately during World War II. market risk represented by change in asset prices and operational risk represented by shortcomings in functional efficiency. this was never undertaken. and is now wholly owned by tis member central banks. Since 2004.

If the earnings and the realizable value of assets are inadequate to meet the obligations of a bank. They are: The Standards Implementation Group (SIG) was originally established to share information and promote consistency in implementation of the risk management norms. The Accounting Task Force (ATF)helps to ensure international accounting and auditing standards and practices promote sound risk management at financial institutions. Capital adequacy therefore means sufficiency of capital to meet possible losses. The Policy Development Group (PDG) helps to identify and review supervisory issues to promote a sound banking system. The Basel Consultative Group (BCG)provides a common forum for supervisor and regulators for incorporating new ideas and amendments to the existing regulations. . The Validation Subgroup explores issues related to the validation of systems used to generate the ratings and parameters that serve as inputs into the internal ratings-based approaches to credit risk. and reinforce the safety and soundness of the banking system. Currently the SIG has two subgroups that share information and discuss specific issues related to implementation of norms. It also initiates dialogue with prospective members for further globalizing the standardizing process. support market discipline through transparency. then there has to be a cushion to absorb the losses. The contribution of the BIS in the area of Risk Management is provided by the committee on Banking Supervision which undertakes its activities through four sub-committees. each of which covers specific areas of Risk Management. To fulfill this objective the task force develops prudential reporting systems and takes an active interest in the development of international accounting and auditing standards. The Operational Risk Subgroup addresses issues related mainly to banks’ implementation of advanced measurement approaches for operational risk. This cushion is in the form of capital.

The Basel Committee on Banking Supervision provides a forum for international cooperation on banking supervisory matters. Each bank was required to maintain capital (Tier 1 and Tier 2) equal to at least 8% of its risk-weighted assets. if a bank has risk-weighted assets of INR 1000 million. Basel II: This accord represents an integration of Basel I capital standards with national regulations. Basel I:  This accord represents the set of international banking regulations put forth by the Basel Committee on Bank Supervision.  Banks operating internationally were required to maintain a minimum amount (8%) of capital based on a percentage of risk. This classification system grouped a bank’s assets into five risk categories for which specific risk weights were assigned.Recent Developments: The BIS provides the Basel Committee on Banking Supervision which has played a central role in establishing the Basel Capital Accords of 1988 and 2004. This is achieved by exchanging information on national supervisory issues. by setting the minimum capital requirements for financial institutions globally with the objective of ensuring institutional liquidity / solvency. which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. For example. Its objective is to enhance understanding of important supervisory issues and improve the quality of banking supervision worldwide. it was required to maintain capital of at least INR 80 million. in 1988. the Committee is known for its international standards on Capital Adequacy.weighted assets. The Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. approaches and techniques. and the Agreement on cross-border banking supervision. with a view to promoting common understanding. . Effective Banking Supervision.  It focused mainly on credit risk by creating an asset classification system. In this regard.

economic and financial shocks. On 4 July 2006. This accord became effective from June 2004. This will ensure that the banking system is in a better position to absorb losses on both a going concern and a gone concern basis. The Committee’s proposals cover the following key areas:  Raising the quality. the Committee issued a comprehensive version of Basel II Framework. Additional proposals were approved in the meeting held on 8-9 December 2009. rather than amplify. consistency and transparency of the capital base. It will provide a more stable banking system. The new guidelines provide a closer alignment between regulatory capital requirements and the assessment of the underlying risk faced by banks.  To strengthen the capital requirements for counterparty credit risk exposures arising from derivatives.  To promote further convergence in the measurement. repos and securities financing activities. . The overall objective is to strengthen global capital and liquidity regulations and promote a more resilient banking system which will facilitate better balance between financial innovation and sustainable growth.  Introducing a global minimum liquidity standard for internationally active banks and a common monitoring mechanism for identifying and analyzing liquidity risk trends at both the bank and system level. management and supervision of operational risk.  Introducing a leverage ratio as a supplementary measure to help contain the build-up of excessive leverage in the banking system. The process requires identification and quantification of risk on an on-going basis so as to improve the ability to manage those risks.  Introducing a series of measures to promote the build-up of capital buffers in good times that can be drawn upon in periods of stress.The Basel II Framework demands more comprehensive measures and minimum standards for capital adequacy and national supervisory authorities are currently in the process of implementing the same in their respective jurisdictions. which will help reduce.

Market risk (interest rate risk. All the other risks a bank may face.) 4. defining default and credit concentration risk) 2. these rules ensure that the amount of capital the bank needs to hold is proportional to its risk exposure so as to safeguard its solvency and overall economic stability. Advanced IRB Approach – use of advanced estimation techniques Pillar 2 deals with the supervisory review process to be followed by the central bank. Standardized approach – use of external credit rating standards 2. which are collectively described as residual risk. Capital adequacy alone may not be sufficient to prevent bank failures. Credit risk (stress testing. market risk and operational risk. Pillar 1deals with holding minimum capital requirements as stipulated for credit risk.The objective of Basel II accord is to establish risk and capital management processes designed to ensure that a bank holds capital reserves appropriate to the risk the bank is exposed to in terms of their lending and investment practices. Principle 3: Supervisors should encourage banks to operate above the minimum regulatory capital adequacy ratios. derivatives. liquidity risk and legal risk. such as systemic risk. asset rate risk) 3. on a continuous basis. It deals with review of risk management procedures with respect to banking risks: 1. strategic risk. etc. concentration risk. process efficiencies. etc. Internal Rating Based (IRB) Approach – use of internal risk assessment systems 3. The important principles involved in Pillar II: Principle 1: Banks should develop a process for assessing the overall capital adequacy. Effectively. It stipulates the following for assigning capital to meet credit risk: 1. Therefore the underlying objective is to ensure that deficiencies are identified and effective action is taken to reduce risk or restore capital. Principle 2: Supervisors (Central Banks) should review and evaluate the internal capital adequacy assessment systems developed by individual banks. Basel II adopts a three pillar approach to risk management. Operational risk (treatment of securitization. .

risk assessment processes and capital adequacy of the banks. This has increased the need for stronger balance sheets providing the capacity to take on the higher risks associated with complex international transactions. Pillar 3deals with the need for market discipline and disclosures required there under. As a member of the world trade organization (WTO).Principle 4: Supervisors should intervene to prevent capital from falling below the minimum levels required to support the assessed risk. In terms of the Basel II Norms. risk exposures. banks should maintain a minimum capital adequacy requirement of 8% of risk assets. by implementing the Basel II Norms. . Introduced in 2004. The Reserve Bank of India has implemented the risk-based supervision guidelines provided under Basel II Pillar 2 on 31stMarch 2009. Comparison between Basel I and Basel II Norms: No BASEL I NORMS BASEL II NORMS 01. Implementation of Basel II in India by RBI: The introduction of the LPG model in India has dramatically increased the volume. the Reserve Bank of India has mandated maintaining of 9% minimum capital adequacy requirement. This assumes greater importance due to India’s dependence on foreign capital flows for sustained economic progress. Procedures are being developed for internal credit risk assessment and operational risks. which rely on internal methodologies for assessing capital requirements. Such disclosures are more important in the case of the banks. sophistication and complexities of transaction being handled by the banking system in India. Introduced in 1988. For Indian banks. This is described as Capital Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR). safety and transparency. Disclosure requirement are stipulated for the banks which risk market participants to assess the information on capital. India is required to ensure that its banking system is at par with global standards in terms of financial health. Internal inspections of banks in India are also turned more towards risk-based audit.

supervision and risk management elements of the banking sector. Stringent disclosure norms to ensure 07. Dependence on credit rating agencies. operational and residual only credit risk. Disclosure norms less comprehensive. innovations such as securitization. market. excess leveraging. Limitation of Basel II 1. Provision for a leverage ratio to avoid 06. liquidity and solvency on an on-going on provisioning for risk. developed risk assessment processes. Inadequate and insufficient disclosure 3. basis. a changing environment. developed by the bank for international settlements. These norms covered assessment of These norms covered assessment of 02. etc. The objective of Basel III is to reduce the possibility of banks destabilizing the economy by taking on excess risk. Basel III Basel III is a set of international banking regulations. approach with fixed risk weights for rating methods as well as internally five asset classes. with a view to promote stability in the international finance system. Operational risk is not quantified. The capital adequacy standard and new capital buffers will require banks to hold more capital and higher quality of capital as . risks. A more flexible approach with focus on A more rigid approach with focus only 04. Basel III proposes new capital. greater discipline. leverage and liquidity standards to strengthen the regulation. These norms did not cover financial These norms have a more 05. comprehensive approach and provide for derivatives. credit. No protection against over-trading. They involved a wider approach They involved ‘one size fits all’ providing for standardized external 03. 2.

as a percentage of assets. An additional 2.compared to the current Basel II rules. Banks are required to fulfill these requirements by 2019. Banks must hold more capital against their assets. The minimum amount of equity. The new liquidity ratios ensure that adequate funds are available in case of crisis.5% “buffer” has to be maintained which the total equity requirement is 7%. Invested will assign a higher P/E multiple to shares of such banks which will reduce cost of raising capital through public issues. The previous guidelines. Greater stability will enable banks to raise debt at a lower cost as they will be perceived as less risky. knows as Basel II norms. which will govern the approach of the regulation and the entire banking sector towards risk management. These proposals have been endorsed by the G20 leaders.  System level. macro prudential regulations. The global financial meltdown following the crises in the US sub-prime market has prompted this change in approach. Basel III Approach: The new norms are Basel on renewed focus of central bankers on macro-prudential stability. Basel III Objectives:  Banks-levels or micro prudential regulation which will help to increase the ability of individual banking institution to manage stress. . The framework of Basel III was accept in September 2009 and concrete proposals were finalize in December 2009. Global regulation are now focusing on financial stability of the system as a whole including micro regulation of individual banks. will increase from 2% to 4. This buffer can be used during times of financial stress but such banks will be prevented from paying dividend and otherwise deploying capital. focused on macro- prudential regulation.5%.

A destabilized banking system affects the availability of credit and liquidity to the economy and leads to loss in economic output. B. both in term of the overall capital requirement and quality of capital because as of 30 June 2010. Reduced frequency of crisis: The costs of banking crisis are extremely high and so is their frequency. in which these costs are more than offset by the long-term gain in the form of sustainable growth. Disadvantages  Banks would be required to put in place automated reporting systems to meet the reporting requirements. Sustainable long term growth: The objective of Basel III reform is to reduce the probability and intensity of future crisis. Increasing the stability of the banking and financial system involve a trade-off.the the Indian banking sector had already achieved the required capital adequacy levels.Impact on Indian Banks: The RBI does not expect the Indian banking system to face any difficulty in meeting the proposed new capital rules. . Advantages A. This involves costs arising from higher regulatory capital and liquidity requirements and more intensive supervision. there have been than 30 major banking crises in Basel committee-member countries. Since 1985. and  Excess leveraging of capital resources C. The common elements in all these cases have been:  Excess liquidity chasing high returns  Inadequate credit assessment  Inadequate understanding risk assessment  Inadequate risk evaluation. Lower economic cost: Banks are highly leveraged institution and function as the center of the credit intermediation process.

Micro-level Risk Management and Capital Planning norms. Enhanced Capital and Liquidity requirements. .  Customized risk measurement and liquidity requirement ratios for different variables will have to be developed. BASEL II BASEL III PILLAR I Minimum Capital requirements. Conclusion This regulation will result in a safer financial system. Enhanced risk disclosures and market III discipline. Enhanced supervisory review process.  Banks will be required to consolidate and maintain a centralized risk data warehouse. PILLAR II Supervisory Review Process. with slightly lower economic growth. They should result in safer and stable markets for both debt stock market investors. PILLAR Disclosures and market discipline.

are to define and implement the monetary policy for the Eurozone. under Article 16 of its Statute. As of 2011 the President of the ECB is Mario Draghi.Background The European Central Bank (ECB) is the central bank for the euro and administers monetary policy of the Eurozone. and it is headquartered in Frankfurt. former governor of the Bank of Italy. ROLE OF ECB The ECB has the mandate to administer the monetary policy of the 17 EU member countries who have adopted the common currency EURO. The owners and shareholders of the European Central Bank are the central banks of the 28 member states of the EU. The capital stock of the bank is owned by the central banks of all 28 EU member states. as mandated in Article 2 of the Statute of the ECB. The bank occupied the Eurotower while new headquarters were being built. These nations are collectively called ‘EUROZONE’. The basic tasks. It is one of the world's most important central banks and is one of the seven institutions of the European Union (EU) listed in the Treaty on European Union (TEU). Member states can issue euro coins. as defined in Article 3 of the Statute. The ECB has. The primary objective of the European Central Bank. to take care of the foreign reserves of the European System of Central Banks and operation of the financial market infrastructure under the TARGET2 payments system and the technical platform (currently being developed) for settlement of securities in Europe (TARGET2 Securities). the ECB also had exclusive right to issue coins). The Treaty of Amsterdam established the bank in 1998. but the amount must be authorised by the ECB beforehand (upon the introduction of the euro. is to maintain price stability within the Eurozone. Germany. which consists of 18 EU member states and is one of the largest currency areas in the world. to conduct foreign exchange operations. the exclusive right to authorise the issuance of euro banknotes. .

Organization The ECB has three decision-making bodies. All lending to credit institutions must be collateralised as required by Article 18 of the Statute of the ESCB. and  the General Council. but close to. Without prejudice to the objective of price stability.Objective Euro banknotes The primary objective of the European Central Bank. The Governing Council confirmed this definition in May 2003 following a thorough evaluation of the ECB's monetary policy strategy. and the HICP target can be termed ad-hoc. “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%” and added that price stability ”was to be maintained over the medium term”. it aims to maintain inflation rates below. the ECB has only one primary objective but this objective has never been defined in statutory law. is to maintain price stability within the Eurozone. . (Harmonised Index of Consumer Prices) Unlike for example the United States Federal Reserve Bank. 2% over the medium term”. The Governing Council clarification has little force in law.  the Governing Council. that take all the decisions with the objective of fulfilling the ECB's mandate:  the Executive Board. the Treaty also states that "the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union". the Governing Council clarified that “in the pursuit of price stability. The Governing Council in October 1998 defined price stability as inflation of around 2%. On that occasion. as laid down in Article 127(1) of the Treaty on the Functioning of the European Union.