Banking Basel Norms

Basel Norms

Basel is a city in Switzerland which is also the headquarters of Bureau of International Settlement (BIS).

BIS fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.

The Bank for International Settlements (BIS) established on 17 May 1930, is the world's oldest international financial organization. There are two representative offices in the Hong Kong and in Mexico City. In total BIS has 60 member countries from all over the world and covers approximately 95% of the world GDP.

OBJECTIVE

The set of agreement by the BCBS (BASEL COMMITTEE ON BANKING SUPERVISION), which mainly focuses on risks to banks and the financial system are called Basel accord. The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses. India has accepted Basel accords for the banking system.

Up till now BASEL ACCORD has given us three BASEL NORMS which are BASEL 1, 2 and 3.

BASEL-1

In 1988,The Basel Committee on Banking Supervision (BCBS) introduced capital measurement system called Basel capital accord, also called as Basel 1. It focused almost entirely on credit risk and structure of risk weights for banks.

The minimum capital requirement was fixed at 8% of risk weighted assets(RWA).

India adopted Basel 1 guidelines in 1999.

BASEL-2

In 2004, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord.

The guidelines were based on parameters as follows-

Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.

The three types of risk are- operational risk, market risk, capital risk.

Banks need to mandatory disclose their risk exposure, etcetera to the central bank.

Basel II norms in India and overseas are yet to be fully implemented.

BASEL 3

In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008.

In 2008, Lehman Brothers collapsed in September. The need for a fundamental strengthening of the Basel II framework had become apparent.

Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.

Presently Indian banking system follows Basel II norms.

The Reserve Bank of India has extended the timeline for full implementation of the Basel III capital regulations to March 31, 2019.