Basel Norms

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  • Basel is a city in Switzerland which is also the headquarters of Bureau of International Settlement (BIS) – Members are Central bank of all Country.
  • BIS fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
  • The purpose of the accord is to ensure that financial institutions have enough capital on account to meet the obligations and absorb unexpected losses.
  • India has accepted Basel accords for the banking system.
  • In 2010, Basel III guidelines were released.
  • These guidelines were introduced in response to the financial crisis of 2008.
Aims
  • Improve The Banking Sector ability to absorb shocks.
  • Improve risk management and governance.
  • Strengthen bank transparency and disclosures.
Components
  • Capital
  • Liquidity
Capital
Tier 1 – Maintain Capital to Manage the capital loss & Run the Business.
Tier 2 – If bank is to wind up, Capital for manage it.
Tier 3 – Capital for maintain external shocks (Disaster, Pandemic, Currency weakening).
  • Tier 1 capital consists of shareholders' equity and retained earnings.
  • Tier 1 capital is intended to measure a bank's financial health and is used when a bank must absorb losses without ceasing business operations.
  • Tier 2 capital is intended to measure a bank's financial health and is used when a bank must absorb losses in the event of winding up so it provides lesser degree of protection
  • Tier 3 capital is used to meet market risk, commodities risk, foreign currency risk
Capital Adequacy Ratio
Total Capital to Risk Weighted Assets
Recommendation of Basel Norms is Banks must maintain 8% CAR (India is 9%)
  • Tier 1 = 6% (India 7%).
  • Tier 2 = 2%.
Pillar 2 - Risk Management and Supervision
  • Internal Assessment process to assess the capital adequacy, risk exposure and device risk management technique.
Pillar 3 – Disclosure (Transparency in Public)
  • Disclosure of certain details like capital adequacy, risk exposure and risk assessment procedure.
Liquidity
  • Liquidity Coverage Ratio – Liquid assets to meet liquidity needs for 30 days (100% coverage by 2019, Now extended to 2022)
  • Net Stable Funding Ratio = Available amount of stable funding / Required amount of stable funding for next 1 year.
Capital Conservation buffer (CCB)
  • CCB is a relatively new concept, introduced under the international Basel III norms.
  • The concept says that during good times, banks must build up a capital buffer that can be drawn from when there is stress.
  • In India, the minimum capital requirement is 9 per cent (CAR).
  • The CCB would be 2.5 percentage points over and above the minimum capital requirement.
  • A major decision was taken at the recent Reserve Bank of India board meeting to push back the deadline for banks to set aside an additional 0.625 per cent as capital conservation buffer.
  • The CCB is being implemented in a phased manner of 0.625 per cent per year from January 1, 2016.
  • The final phase is now delayed by a year, till March 31, 2020. (Now extended to 2022).

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