BASEL III AND ITS IMPACT ON THE INDIAN

BANKING SECTOR

Presented by:-
Abhishek Sagar - 2A
Nikhil Singh - 33A
Ritesh Bhat - 43A
Soumya Dubey - 52A
Vikalp Mishra - 56A
FLOW OFTHEPRESENTATION
PART I:
 BASEL I

PARTII
 BASEL II

PART III
 BASEL III

 CASE STUDY 2
WHY CAPITAL REQUIREMENT?

 While bank’s assets (loans & investments) are riskyand

prone to losses, its liability(deposits) are certain.

 Assets = External Liabilities + Capital.

Liabilities (deposits) to be honoured. Hence reduction in
capital. When capital is wiped out –Bank fails.

 Bank failures - mainly by losses in assets – default by

borrowers (Credit Risk), losses of investment in different
securities (Market Risk) and frauds, system and process
failures (Operational Risk)
BASELCOMMITTEE
 Committee—a group of eleven nations

 Liquidation of Cologne-based BankHerstatt

 Toachieve this goal G-10 countries agreed in Basel,

Switzerland to form a quarterlycommittee

 Comprising of each country’s central bank and leadbank

supervisory authority

4
BASEL 1
 Set up an international 'minimum' amount of capital that banks
should hold.

 ‘minimum’ amount of capital—minimum risk-based capital

adequacy

 The set of agreement- mainly focuses on

risks to banks
the financial system

 To ensure that financial institutions

have enough capital on account to meet obligations
absorb unexpected losses.

 Focused on credit risk.

5
 Supervision should be adequate.
THEACCORD
 Divided into 4pillars:
1. The Constituents of Capital

2. Risk Weighting

3. ATarget Standard Ratio

4. Transitional and Implementing Agreements

6
 PITFALLS

 Limited differentiation of credit risk

 Static measure of default risk

 No recognition of term-structure of credit risk

 Simplified calculation of potential future counterparty risk

 Lack of recognition of portfolio diversification effects

 Falsification of balance sheets

7
SHIFT FROM BASEL I TO BASEL II
 BASEL II NORMS
 Basel II was intended :
– to create an international standard for banking regulators
– to maintain sufficient consistency of regulations.
– protect the international financial system

 Addition of operational risk in the existing norms

 Defined new calculations of credit risk

 Ensuring that capital allocation is more risk sensitive

OBJECTIVESOFBASEL II
1. Better Evaluation of Risks

2. Better Allocation of resources

3. Supervisors should review each bank’s own

risk assessment and capital strategies.

4. Improved Risk management

5. To strengthen international bankingsystems.

BASEL II FRAMEWORK
FAILURE OF BASEL II
 Banks defined their own risk metrics and derivative
investments

 Depends on good underlying data

 Most of the institutional cogs in the credit crisis aren’t

covered

 No independent standard.

 Wrong assumptions in case of mortgage-related risk

calculations.

 Inadequate level of capital required by the new discipline

BASEL III ACCORD
 The G20 endorsed the new ‘Basel 3’ capital and liquidity
requirements.

 Extension of Basel II with critical additions, such as a leverage ratio, a

macro prudential overview and the liquidity framework.

 Basel III accord provides a substantial strengthening of capital requirements.

 Basel III will place greater emphasis on loss-absorbency capacity on agoing

concern basis

 The proposed changes are to be phased from 2013 to 2015

 The creation of a conservation buffer could be set up by banks during the

period January 2016 to 2019.
13
BASEL III-OBJECTIVES
 Special emphasis on the Capital Adequacy Ratio
 Capital Adequacy Ratio is calculated as –
 CAR = (Tier 1 Capital + Tier 2 Capital) / Risk
WeightedAssets
 Reducing risk spillover to the real economy

 Comprehensive set of reform measures to

strengthen the banking sector.

 Strengthens banks transparency and

disclosures.

 Improve the banking sectors ability to 14

absorb shocks arising from financial and
economic stress.
 MAJOR FEATURES OF BASEL III

 Revised Minimum Equity & Tier 1 Capital Requirements

 Better Capital Quality
 Backstop Leverage Ratio
 Short term and long term liquidity funding
 Inclusion of Leverage Ratio & Liquidity Ratios
 Rigorous credit risk management
 Counter Cyclical Buffer
 Capital conservation Buffer
 PILLARS
 Minimum Regulatory Capital Requirement based on Risk weighted assets

 Maintaining capital ( Credit, market and Operational Risk)

 Supervisory Review Process

• Regulatory Tools and Frameworks to deal with risks.

 Market Discipline.
• Transparency of Banks

16
 RATIOS
 Leverage Ratio ≥ 3%

 Liquidity Coverage Ratio =

Stock of high quality liquid assets ≥ 100%
Net cash outflows over a 30-day period

 Net Stable Funding Ratio (NSFR) =

Available amount of stable funding ≥ 100%
Required amount of stable funding

17
 COMPARISON OF CAPITAL REQUIREMENTS
UNDER BASEL II AND BASEL III
Requirements BASEL II BASEL III
Minimum Ratio of Total
8% 11.50%
Capital To RWAs
Minimum Ratio of Common
2% 4.50% to 7.00%
Equity to RWAs
Tier I capital to RWAs 4% 6.00%
Core Tier I capital to RWAs 2% 5.00%
Capital Conservation Buffers
to RWAs None 2.50%

Leverage Ratio None 3.00%

Countercyclical Buffer None 0% to 2.50%
Minimum Liquidity Coverage
Ratio None TBD (2015)
Minimum Net Stable Funding
Ratio None TBD (2018)
IMPACT ON INDIAN BANKING SYSTEM
 Profitability
 Capital acquisition

 Liquidity Needs

 Limits on lending

 Bank consolidation

 Pressure on Yield on Assets

 Pressure on Return on Equity:

 Stability in the Banking system

19
IMPACT ON PUBLIC SECTOR
 Public sector banks- needs Rs.1 trillion over
10-5 years

 Some public sector banks are likely to fall short

of the revised core capital adequacy
requirement.

 Government to recapitalize an estimated Rs

900 billion or be ready to reduce their equity
stake in banks below 50%.
 Increase in the requirement of capital will affect the
ROE of the Public banks. 20
POTENTIAL RESPONSES BY BANKS

 Operational responses
RWA optimization, Stricter credit approval
processes
 Tactical responses

Risk-sensitive pricing, Shift to longer-term

funding Reduction of securitization
exposures
 Strategic responses

- Sale of business unit, Change of holding

structure 21
CHALLENGES OF BASEL 3

22
 CONCLUSION

 One shoe doesn’t fit all.

 Monetary policies of Central Banks in each country
(example RBI’s CRR, SLR, Repo etc.) make it
difficult to uniformly implement BASEL norms
 Exercising controls on the capital, liquidity and
leveraging of banks will ensure that they have the
ability to withstand crises.

23
24