Wednesday, 2 April 2014

BASEL NORMS


  • In 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992.
  • Its objective is to enhance understanding of key supervisory issues and improve quality of banking supervision worldwide.
  •  It does so by exchanging information on national supervisory issues and techniques with a view to promoting common understanding.

BASEL I Norms

  • Established in the year 1988.
  • Attempts to introduce minimum standards of capital adequacy.
  • According to BASEL I financial institutions are categorized based on capital adequacy(capital required to face an unexpected loss).

BASEL II Norms

  • Established in the year 1999.
  •  Basel II has been introduced to overcome the drawbacks of Basel I.
Stresses on 3 factors:

  1. Capital Adequacy.
  2. Supervisory Review.
  3. Market Discipline.
CAPITAL ADEQUACY
  •  Capital Adequacy Ratio or Capital to Risk Weighted Asset Ratio of minimum 8% must be maintained.
CAR/CRAR= (Tier 1 Capital + Tier 2 Capital) /Risk Weighted Assets

SUPERVISORY REVIEW
  • Banks should develop and use better risk management techniques in monitoring and managing their risks like Credit Risk, Operational Risk and Market Risk.
  • Supervisors should review and evaluate banks internal capital adequacy and should have ability to monitor and ensure banks compliance with regulator capital ratio.
MARKET DISCIPLINE
  • Imposes banks to conduct their banking business in a safe sound and effective manner.
  •  Banks should make mandatory disclosure on capital, risk exposures etc so that market participants can asses a banks capital adequacy.

BASEL III Norms

  • Framed in response to the global economic slowdown of 2008.
  • Capital Adequacy of minimum 9% must be maintained.


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