Basel norms

What is base norms?

Ans. Basel Norms are International banking regulations issued by the Basel committee on Banking Supervision(BCBS). It is an effort to coordinate banking regulation across the globe with the goal of strengthening the International Banking System. It consist of representatives from Central bank and regulatory of 27 countries( including India).

Why it is called Basel?

Ans. It is called Basel because its headquarter is in the city of B asel in Switzerland.Hence, it is called Basel norms.

How many set of regulation Basel Committee issued as of 2018?

Ans. Basel Committee issued 3 sets of regulation as of 2018 known as Basel I, II and III.

Why do we need Basel norms?

The purpose of the Basel Norms is to ensure that financial institutions have enough capital on account to meet obligation and absorb unexpected losses.

Explain all three set of Basel Norms?

Basel I– It was introduced in the year 1988.It focussed on credit default risk faced by bank. As per Basel I banks are required to maintain a capital adequacy ratio of 8%.

Capital Adequacy Ratio– The capital adequacy ratio , also known as capital to Risk Weighted Asset Ratio(CRAR), is used to protect depositors and promote the stability and efficiency of financial system around the world.

The capital was classified into Tier I and Tier II capital. 1) Tier 1 capital is the core capital of a bank that is permanent and reliable. It includes equity capital and disclosed reserves. 2) Tier 2 capital is the supplementary capital. It includes undisclosed reserves , general provisions, provisions against non performing assets, cumulative non – redeemable preferences share etc. India adopted Basel I in 1999.

Basel- II was issued in 2004. It is based on three pillars. They are minimum capital, supervisory review process, and Market discipline disclosure. A) Minimum capital is the technical, quantitative heart of the accord .Banks must hold capital against 8% of their assets after adjusting their assets for risk. B) Supervisor review is the process whereby national regulators ensure, their home country banks are following the rules .If minimum capital is rule boom, the second pillar is the referee system. C) Market discipline is based on enhanced disclosure of risk. This may be an important pillar due to the complexity of Basel. Under Basel II , banks may use their own internal models ( and gain lower capital requirements) but the price of this is transparency. Basel II norms charges for three risks that is credit risk, market risk and operational risk.A bank must hold capital against all three types of risk.The charge for market risk was introduced in 1988. Presently, India follows Basel II norms.

Basel III is the 2009 International regulatory accord that introduced a set of reforms designed to improve the regulation, supervision, and risk management within the banking sector. Basel III is an interior step in the ongoing effort to enhance the banking regulatory framework. A consortium of central banks from 28 countries published Basel III in 2009, largely in response to the credit crisis resulting from the 2008 economic recession. Guidelines of Basel III: 1) Capital- The capital adequacy ratio is to be maintained at 12.9%. The minimum Tier-1 capital ratio and Tier 2 capital ratio have to be maintained at 10.5% and 2% of risk-weighted assets respectively. 2) In addition, banks have to maintain a capital conservation buffer of 2.5 %. 3) Counter-cyclical buffer is also to be maintained at 0 – 2.5%. 4)The leverage rate has to be at least %. The leverage rate is the ratio of a bank’s tier-1 capital to average total consolidated assets. 5)Liquidity: Basel-III created two liquidity ratios: LCR and NSFR. The liquidity coverage ratio(LCR) will require banks to hold a buffer of high-quality liquid assets sufficient to deal with the cash outflows encountered in acute short term stress.  the scenario as specified by supervisors. The minimum LCR requirement will be to reach 100% on 1 January 2019. This is to prevent situations like “Bank Run”. The goal is to ensure that banks have enough liquidity for a 30-days stress scenario if it were to happen. On the other hand, the Net Stable Funds Rate (NSFR) requires banks to maintain a stable funding profile in relation to their off-balance-sheet assets and activities.NSFR requires banks to fund their activities with stable sources of finance. LCR measures short term 30 days resilience and NSFR measures medium-term 1-year resilience. The deadline for the implementation of Basel-III was March 2019 in India. It was postponed to March 2020. Due to the coronavirus pandemic, RBI decided to defer the implementation of basel norm III by further 6 months.

• )