BMT 6133 –Management of BANKS

Module I C
BIS – Basel ,Switzerland

 Estd., 17th May 1930

 H.O : Basel ,Switzerland

 Rep. off : Hong Kong & Mexico City

 600+ staff members

 60 member central banks of Countries accounting for 95%

of World GDP

 BIS capital is held by central banks only

 Oldest international financial organisation

BIS – Mission and Role

 Dialogue and collaboration among central banks

 Research on policy issues for monetary and financial
supervisory authorities
 Act as prime counter party for central banks in
transaction
 Bank for central banks
 International monetary and financial co-operation
 Dispute settlements
 Recommending regulatory and supervisory norms
Basel Functioning
 The BIS promotes international cooperation among monetary authorities
and financial supervisory officials through its meetings , programmes and
through the Basel Process

 Meeting
 The Basel Process, committees and secretariats

 Three departments
 Monetary and economic department
 Banking department
 General secretariat
 Also supported by the units for legal services, risk management, internal
audit and compliance
Meetings

 At bimonthly meetings, normally held in Basel,

Governors and other senior officials of BIS member
central banks discuss current developments and the
outlook for the world economy and financial markets.
 exchange of views and experiences on issues of special
and topical interest to central banks.
 other regular consultations that variously include public
and private sector representatives and the academic
community.
Basel committees
 Basel Committee on Banking Supervision (BCBS)

 Committee on the Global Financial System

 Committee on Payments and Market Infrastructures

 Markets Committee

 Central Bank Governance Group

 Irving Fisher Committee on Central Bank Statistics.

Basel committee on banking
supervision (bcbs)
 The Basel Committee - initially named the Committee
on Banking Regulations and Supervisory Practices - was
established by the central bank Governors of the G10
countries at the end of 1974.
 to enhance financial stability by improving the quality
of banking supervision worldwide
 to serve as a forum for regular cooperation between its
member countries on banking supervisory matters.
 expanded its membership from the G10 to 45
institutions from 28 jurisdictions
 BASEL I ,II and III – accords on capital adequacy
 Basel accords
Basel I : the Basel capital accord
 1980’s Latin American Debt crisis
 1970-80 recession & oil price shock
 Oil wealth flight to banking system in the form of loan
 Argentina, Brazil and Mexico –huge borrowers
 external debt from USD $ 75 Billion in 1975 to more than USD $ 315 Billion in 1983
 Increase in int. rate and weakness in currency
 1988 July Basel Capital Accord implementation
 Min. capital to RWA (risk weighted asset) -8.0%
 The Basel I norms identified capital as the ‘Core Capital’ and ‘supplementary
capital
Basel I : the Basel capital
accord
 Basel I also brought in the addition of three different
types of risks viz
 On Balance Sheet risk
 Trading off-balance sheet risk
 Non-trading off balance sheet risk
 1996-amemndment to incorporate market risk (banks
exposure to exchange rate, equity, debt sec.,
commodities and derivatives)
Basel II : the new capital
framework
 2004 – revised framework called as BASEL II
 BASEL II comprised of THREE PILLARS principles
1. minimum capital requirements, (to develop and expand
the standardized rules set out in the 1988 Accord)
2. supervisory review of an institution's capital adequacy
and internal assessment process
3. effective use of disclosure as a lever to strengthen
market discipline and encourage sound banking practices
Basel III : responding to the 2007-
09
financial crisis
 Lehman Brothers collapsed in September 2008
 Huge exposure to real estate mortgages
 US Subprime loans (US Subprime Crisis)
 Housing market collapse
 The securitization and the CDS credit default swap (AIG bailout)
 Banking sector had too much leverage and inadequate liquidity buffers
 Poor governance and risk management
 Lucrative incentives
 Role of credit rating agencies
 Too Big to Fail
The dangerous combination of these factors was demonstrated
by the mispricing of credit and liquidity risks, and excess
credit growth
 Basel CRAR (capital adequacy
ratio) 2016 2017 2018 2019
Capital conservation buffer
0.625 1.25% 1.875% 2.5%

Min. common equity capital

ratio 4.5% 4.5% 4.5% 4.5%

Min. common equity +

capital conservation buffer 5.125% 5.75% 6.375% 7.0%

Min. total capital

8.0% 8.0% 8.0% 8.0%

Min. total capital +

conservation buffer 8.625% 9.25% 9.875% 10.5%
methodology