• Risk management has attracted the interest of financial and banking institutions

recently.
• Financial crises have had a significant impact on bank regulation and supervision.
• Reforms are often focussed on correcting past failings. The financial industry has
experienced financial problems and crises which lead to heavy losses and bankruptcy.
• The global intertwining of banking institutions, globalization of financial services, the
growth of the bank credit market and its diversification have increased these risks.
• Therefore new efficient methods and tools need to be developed
• Following the 2007 financial crisis, Basel III reforms have been introduced with a view
to promote a more resilient banking sector and to improve the banking sector’s ability
to absorb shocks arising from financial distress.
Risk management
• is a scientific approach dealing with pure risks by anticipating
potential losses and designing and implementing measures that will
reduce the occurrence of such losses.
• The activity of any bank implies risk management and banks will
always face risks.
• From this point of view, managing these risks does not mean
removing them permanently, but managing them intelligently and
working to increase the return which is ultimately the true measure of
success.
Bank risk management
• is identifying, analyzing and controlling the economic risks that
threaten the financial assets of the institution or the investor.
• In addition, risk management is the identification, measurement,
follow-up, and management of various threats.
• Risk management encompasses the administrative arrangements
aimed at protecting the bank's assets and profits by reducing the
chances of expected losses to minimum, whether they be due to
natural causes, human error or legal provisions.
 • The role played by a prudent banking system in the economic
stability of a nation is very crucial . The failure can cause negative
systemic consequences and significant bailout costs to government .
Hence the need for a regulatory measures to strengthen the
supervision and regulation of international banks increased.
• The Basel Committee on Banking Supervision (BCBS) is the global
standard setter for the prudential regulation of banks set with an
BASEL framework objective to strengthen the supervision , regulation, and practices
which ensures financial stability .BCBS act as a forum for regular
for the risk cooperation on banking supervisory matters. The committee consists
of representatives of the central banks and regulatory authorities
management of participant countries. India is also a member .
• Basel is an international regulatory accord that introduced a set of
reforms designed to mitigate risk within the international banking
sector, by requiring banks to maintain proper leverage ratios and
keep certain levels of reserve capital on hand.
• The main regulation issued are Basel-I, II, and III.
Understanding Basel III
• Basel III, which is alternatively referred to as the Third Basel Accord or
Basel Standards, is part of the continuing effort to enhance the
international banking regulatory framework.
• It specifically builds on the Basel I and Basel II documents in a
campaign to improve the banking sector's ability to deal with financial
stress, improve risk management, and promote transparency.
• On a more granular level, Basel III seeks to strengthen the resilience
of individual banks in order to reduce the risk of system-wide shocks
and prevent future economic meltdowns.
Understanding Basel III
• Minimum Capital Requirements by Tiers
• Banks have two main silos of capital that are qualitatively different from one another.
• Tier 1 refers to a bank's core capital, equity, and the disclosed reserves that appear on
the bank's financial statements. In the event that a bank experiences significant
losses, Tier 1 capital provides a cushion that allows it to weather stress and maintain
a continuity of operations.
• By contrast, Tier 2 refers to a bank's supplementary capital, such as undisclosed
reserves and unsecured subordinated debt instruments that must have an original
maturity of at least five years.
• A bank's total capital is calculated by adding both tiers together. Under Basel III, the
minimum total capital ratio is 12.9%, whereby the minimum Tier 1 capital ratio is
10.5% of its total risk-weighted assets (RWA), while the minimum Tier 2 capital ratio is
2% of the RWA.
Understanding Basel III
• Countercyclical Measures
• Basel III introduced new requirements with respect to regulatory capital
with which large banks can endure cyclical changes on their balance
sheets.
• During periods of credit expansion, banks must set aside additional capital.
• During times of credit contraction, capital requirements can be relaxed.
• The new guidelines also introduced the bucketing method, in which banks
are grouped according to their size, complexity, and importance to the
overall economy.
• Systematically important banks are subject to higher capital requirements.
Understanding Basel III
• Leverage and Liquidity Measures
• Basel III likewise introduced leverage and liquidity requirements aimed
at safeguarding against excessive borrowing, while ensuring that banks
have sufficient liquidity during periods of financial stress.
• In particular, the leverage ratio, computed as Tier 1 capital divided by
the total of on and off-balance assets minus intangible assets, was
capped at 3%.