A presentation on««..

BASEL 1
Prepared by: Palak & Ripal

INTRODUCTION TO BASEL COMMITTEE A Group of eleven nations decided to form a co-operative council to harmonize banking standards and regulations internationally within the member states.  Strict supervision. y .  Promote adequate banking supervision. ‡ It can not enact legally binding standards. y Goal:  Extend regulatory coverage.

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

y .SCOPE O BASEL 1 Created for G-10 which are developed nations and not for emerging economies. interest rate changes etc are not covered. y It only proposes minimum capital requirement for internationally active banks. y It only provides information on adequate capital to guard against risk of creditworthiness other areas such as fluctuation in nation's currency. macroeconomic downturn.

FOUR PILLORS OF BASEL 1 1) The constituents of capital CONSTITUENT Banker·s reserve How much reserve to be hold Tier 1 Tier 2 .

high risk  variable depending on central bank·s discretion .moderate risk  100% .riskless  20% .low risk  50% .FOUR PILLORS OF BASEL 1 2) Risk weighing It divides bank·s assets into five categories  0% .

OECD bank debt. real estate. central bank and government debt and any OECD government debt  0%.cash. capital instruments issued at other banks . OECD securities firm debt. 20% or 50% . plant and equipment. cash in collection  50% .private sector debt.public sector debt  20% . 10%.residential mortgages  100% . 0% . non-OECD bank debt (maturity over a year). non-OECD bank debt (under one year maturity) and non-OECD public sector debt.development bank debt.

 Tier 1 capital must cover 4% of a bank·s risk-weighted assets.  It sets a universal standard whereby 8% of a bank·s risk-weighted assets must be covered by Tier 1 and Tier 2 capital reserves.FOUR PILLORS OF BASEL 1 3) A target standard ratio  It combines pillar 1 and pillar 2. .

 Each country·s central bank is requested to create strong surveillance and enforcement mechanisms to ensure the Basel Accords are followed .FOUR PILLORS OF BASEL 1 4)Transitional and implementing agreements  sets the stage for the implementation of the Basel Accords.

y Application to emerging economies y . y Weak influence y Inability to publicize in lay-men·s terms.CRITICISMS: Narrow scope. y Oversell of the terms of BASEL 1 y Wide breath and absoluteness of BASEL 1·s risk weighing.

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