09/02/2023

Basel Accord
q The Basel Accords are a set of international banking regulations that were developed to promote
stability in the global financial system.
q Basel is the city of Switzerland which is also the headquarters of one of the oldest financial
organization BANK OF INTERNATIONAL SETTLEMENTS (BIS) established in 17th MAY 1930. In
Basel, Governors of G10 countries had a meeting and formed a committee known as BASEL
COMMITTEEON BANKING SUPERVISION (BCBS) in1974 aftermath of serious issues in
international currency and the collapse of Bretton woods system which leads to failure of Bank
Haus Hersttatt in west Germany.
q Basel I, II, and III are three versions of these accords that have been implemented over time. Each
version has its own unique features and objectives, but they all share a common goal: to ensure that
banks maintain adequate levels of capital to absorb losses and remain solvent during times of
economic stress.

SAMPLE FOOTER TEXT 1

09/02/2023

Basel I: Basel capital accord

 Basel I, also known as the Basel capital Accord, was introduced in 1988 and is considered to be the first global
regulatory framework for banks. Its key objective was to ensure that banks maintained adequate capital
reserves to cover their risks.
 Under Basel I, banks were required to maintain a minimum capital adequacy ratio (CAR) of 8%, which meant
that they had to hold at least 8 cents in capital.

 Pakistan has implemented this Basel accord in 1997.

 Shortcomings:

 It only focuses on credit risk while ignoring all other types of risks.

SAMPLE FOOTER TEXT 2

09/02/2023

Basel II: Revised capital framework

 Basel II, the second version of the Basel Accord, aimed to improve upon the first version by addressing
its weaknesses and introducing new measures to strengthen the banking industry and introduced
operational and market risks as well.
 Basel II has three pillars as MCR, SRP and market discipline.
 SBP implemented the Basel II in 2008 and required the banks to calculate their CAR against credit,
market and operational risk.
 The major shortcoming of this Basel norm was that it was not mentioned in this accord that how much
a bank must need to maintain at the time of disasters.

SAMPLE FOOTER TEXT 3

09/02/2023

Economic crises and Basel II.5

2007-2008 economic crises were shot few years after the implementation of basel II.

BCBS reacted to this situation by introducing the review of basel II as basel II.5 and gives four main features as:
1-IRC
2-SVAR
3-comprehensive risk
4-RE securization process
these features helps a lot in the economic crises but it was obivious that this cannot prevent another major
disasters in future

SAMPLE FOOTER TEXT 4

09/02/2023

Basel III: Regulatory framework

• Basel III is the latest version of the Basel Accord, which was introduced in response to the global
financial crisis of 2008. It aims to address the weaknesses of the previous versions by strengthening the
regulation of banks and improving their resilience to financial shocks.
• One key feature of Basel III is the introduction of a new capital conservation buffer (2.5%)  brining the
total common equity requirements 7% , countercyclical buffers (2.5%) and introduced global liquidity
standard and new leverage ratio.
• SBP has implemented basel III in 2013.

SAMPLE FOOTER TEXT 5

09/02/2023

Basel IV

• Basel IV is also known as the Basel III.1 and is considered as the final version of Basel III and BCBS
published its intitail assessment in Jan, 2021. It focuses on the higher quality capital and liquidity
requirements requires by the banks to absorb uncertain losses.
• It has divided into two parts , the first part consist of counterparty risk, market risk , large exposure risk
and  net stable funding ratio while the other part includes credit risk by internal and mitigation models,
operational risk and CVA.
• it has not been implemented by SBP in pakistan yet.

SAMPLE FOOTER TEXT 6

09/02/2023

countries did not implement Basel

• Many countries have not implemented the basel accord like Sudan, Syria, Sumalia, Afghanistan, Iraq.
This may be because of many reasons:
• 1- basel demands significant resources
• 2-find it difficult to reach a consensus within their domestic policy making decisions.
• 3- Countries may have diverse financial system and may opt for some other regulatory frameworks that
better align with their specific banking structures.
• Some countries have partially implemented the Basel standards like USA and Japan nut BCBS
continued to engage with different countries for the adoption and implementation of these basel accord.

SAMPLE FOOTER TEXT 7

09/02/2023

cash reserve ratio (CRR)

• The Cash Reserve Ratio (CRR) is a monetary policy tool used by central banks to regulate the amount
of money in circulation. It is the percentage of total deposits that commercial banks must hold as
reserves with the central bank.
• State bank of Pakistan (SBP) issued that Cash reserve ratio(CRR) should be maintained at an average
of 6% of total net demand and time liabilities (NDTL)and subject to minimum daily requirement of
4%.

SAMPLE FOOTER TEXT 8

09/02/2023

statutory liquidity ratio (SLR)

• The Statutory Liquidity Ratio (SLR) is a monetary policy tool used by the central bank to regulate the
liquidity in the banking system. It requires banks to maintain a certain percentage of their net demand
and time liabilities (NDTL) in the form of liquid assets such as cash, gold, or government securities.
• The SLR serves as a safety net for depositors and helps ensure the stability of the banking system. The
statutory liquidity ratio (SLR) issued by state bank of Pakistan is 18%(excluding the CRR) and is
calculated on the basis of total demand and time liabilities.

SAMPLE FOOTER TEXT 9

09/02/2023

capital adequacy ratio (CAR)

• The capital adequacy ratio (CAR) is a measure of a bank's ability to absorb potential losses that may
arise due to credit risk, market risk, or operational risk. It is calculated as the ratio of a bank's capital to
its risk-weighted assets.
• The CAR is an important metric for regulators as it ensures that banks have enough capital to withstand
unexpected losses. A higher CAR indicates that a bank has more capital to absorb losses and is
therefore considered to be more stable and less risky.

• The state bank of Pakistan has issued the CAR of 12.5% (previously 10%) whichincludes 2.5% of
capital conversion buffer as introduced in Basel III.

SAMPLE FOOTER TEXT 10

09/02/2023

Minimum capital requirement (MCR)

The minimum capital requirement (MCR) is a key component of the Basel Accords, which sets out the
minimum amount of capital that banks must hold as a buffer against financial risk. Essentially, it is the
amount of money that a bank must have on hand to cover potential losses.
State bank of Pakistan stated that all the locally existing banks should maintain a MCR a minimum of
Rs10 billion, foreign banks are required to maintain Rs3billion if they are operating with 5 or less
branches and Rs10 billion if have more than 50 branches and DFI are required to maintain a MCR
minimum of  Rs6 billion

SAMPLE FOOTER TEXT 11

Risk measures used by JPMorgan chase &
09/02/2023

co
• JPMorgan Chase & Co. uses a variety of risk measures to manage and mitigate potential risks in its
operations. One of the primary risk measures used by the company is Value at Risk (VAR), which is a
statistical technique used to measure and quantify the level of financial risk within a portfolio or trading
position.

• JPMorgan also uses stress testing, which involves simulating various scenarios to assess how different
market conditions would impact the company's financial performance.
• JPMorgan uses customized risk management approach and includes setting a risk budget, measuring its
utilization and stress testing portfolios.

• JPMorgan also uses quantitative models and market data helping them make informed decision making.

SAMPLE FOOTER TEXT 12

09/02/2023

Risk measures used by BOA

• BOA uses Stress Testing, which involves simulating extreme market scenarios to assess the resilience
of the bank's balance sheet and risk management processes.
• Bank of America (BOA) uses various kinds of risks like liquidity risk, market risk, interest risk, credit
risk management and strategic risk management through various kinds of strategies like planning and
controlling , models ,limits and hedging policies.

SAMPLE FOOTER TEXT 13