Department Banking & Finance

MBA-III (Eve) Assignment: 1 Banking operation management Topic Submitted To: Submitted By: Roll no: Date of Submission: BASEL System Mr Usman Bashir Bushra Shoaib 7248 20/10/2011

What is Basel?
A set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets.

Basels history:
o Basel Committee was constituted by the Central Bank Governors of the G-10 countries.
o

The Committee's Secretariat is located at the Bank for International Settlements in Basel, Switzerland.

Its objective is to enhance understanding of key supervisory issues and quality improvement of banking supervision worldwide.

This committee is best known for its international standards on capital adequacy; the core principles of banking supervision and the concordat on cross-border banking supervision.

Basel I
Basel I is the round of deliberations by central bankers from around the world,

and in 1988, the Basel committee (BCBS) in Basel, Switzerland, published a set of minimal capital requirements for banks.
It primarily focused on credit risk.

Basel I is now widely viewed as outmoded, and a more comprehensive set of guidelines, known as Basel II are in the process of implementation by several countries.

The Purpose of BASEL I:

In 1988, the Basel I Capital Accord was created. The general purpose was to: 1. Strengthen the stability of international banking system

2. Set up a fair and a consistent international banking system in order to decrease competitive inequality among international banks. The basic achievement of Basel I have been to define bank capital and the so-called bank capital ratio.

Basel II:
Basel II is a type of recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision that was initially published in June 2004. The objective of Basel II is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Basel II includes recommendations on three main areas: risks, supervisory review, and market discipline. Also known as "Capital to Risk Weighted Assets Ratio (CRAR)."

SALIENT FEATURES AND OVERVIEW

The objectives of the Accord are:

To maintain safety and soundness in the financial system and to therefore maintain at least the current level of capital in the system; To enhance competitive equality; To introduce a more risk sensitive framework that closely aligns internal economic capital with regulatory capital; and To focus on internationally active banks.

The Accord has formalized a framework consisting of three pillars:

Pillar 1 - minimum capital requirements Pillar 2 - supervisory review Pillar 3 - market disclosure

The First Pillar:

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 second Pillar:

The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk

and legal risk, which the accord combines under the title of residual risk. It gives bank a power to review their risk management system.

The Third Pillar:

The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately.

BASEL III:
Is a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. The third of the Basel Accords was developed in a response to the deficiencies in financial regulation revealed by the global. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The OECD estimates that the implementation of Basel III will decrease annual GDP growth by 0.05 to 0.15 percentage point. "Basel III" is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. These 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 Strengthen banks' transparency and disclosures.