1. What are BASEL 1, 2 and 3 norms? What are the basic differences between these norms?

Basel I is a set of international banking regulations created by Basel Committee on Bank

Supervision that establishes the minimum capital requirements for financial firms with the
objective of minimizing credit risk. The Basel Committee on Bank Supervision goal is to
enhance financial stability by improving supervisory know-how and the quality of banking
supervision worldwide which is done through regulations called accords. Basel I was the first
accord. It focused mainly on credit risk by creating a bank asset classification system. Basel
improved the international regulation policy with structured rules and procedures. Basel II
expanded rules for minimum capital requirements established under Basel I and gave the
framework for regulatory review, also set out disclosure requirements for assessment of capital
adequacy for banks. Basel III is an international regulatory accord that introduced a set of
reforms designed to improve the regulation, supervision and risk management within the banking
sector. in response to the credit crisis, banks are required to maintain proper leverage ratios and
meet certain minimum capital requirements. The main difference between Basel I, Basel II and
Basel III are that Basel II incorporates credit risk of assets held by financial institutions to
determine regulatory capital ratios. Basel III are the monitory regular for the banks.

2. Define the Moral-Hazard and adverse selection Problems in the context of (international)
lending and summarize the main points of this article (in one paragraph):
Moral-hazard is that idea that with insurance in play, it increases the chances that events
being insured against will take place. This is because insurance reduces the incentives for the
insured party to take preventive actions. In simple terms the party insured will display more
risker actions than they would without insurance. In terms of lending (internationally) if country
A lends money to country B and country B has a federal reserve or central bank assist at ready in
case of unexpected losses or debt to replace the money lost, country B may be as precaution with
the money borrowed. Adverse selection is when one party has more available and accurate
information compared to the other party that they are in dealing with. Adverse selection in a case
of lending or foreign direct investment, country A makes investment into country B, but country
B has information about its economy or current stability that country A is not aware of. This puts
country A at a disadvantage because of they had known the same information as country B they
could have possible receive a higher interest rate on their investment as the investment was more
risk than they anticipated.

3. Contrary to its practices of advising countries not to use Capital Controls- — limits on
the international movement of funds, hot money in particular (as it did to Malaysia in the
1990s), the IMF now seems to accept the possibilities of capital control measures being
effective! Carefully read this article and provide a short summary (less than a page long). 
The IMF is now considering the possibilities of capital control measures can be used to
address the risk posed by large capital inflows. There is generally minimal experimental
research on the adequacy of capital flow measures other than capital controls in dealing with
the dangers from inflows in nations with an extensively open capital record. The IMF is
banking on the capital control measures primary objective which was the reducing the
volume of inflows, stemming currency appreciation, changing their composition, slowing
credit growth, providing greater room for maneuver for monetary policy and dampening
asset price bubbles. However, the effectiveness of capital control is still inconclusive as it is
not yet fully understood. Measuring effectiveness is often complicated because capital flow
measures are almost always part of a bigger part of policies, all of which can have an effect
on capital inflows. CFMs could be over and again fortified and extended to cover extra sorts
of exchanges, with more grounded authorization. Be that as it may, this may in the end result
in an intensely controlled outside trade and money related framework. However, prudential
measures to be more success in stemming credit growth and addressing financial stability
concerns than capital controls, but they only rarely reduced appreciation pressures and
aggregate flows.