The 3 Basels and their Norms

The 3 Basels and their Norms

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The BCBS has made a series of agreements known as the "Basel accord" that primarily address threats to banks and the financial system. The objective of the agreement is to guarantee that financial institutions possess sufficient capital to fulfill their obligations and cover any unanticipated losses. India has consented to the banking system Basel accords. In point of fact, the RBI has set standards for a few parameters that are more stringent than those of the BCBS.

A Look Back at the Past

The Basel Committee, formerly known as the Committee on Banking Regulations and Supervisory Practices, was established at the end of 1974 by the Governors of the Group of Ten countries' central banks in response to significant disruptions in international currency and banking markets, most notably the failure of the West German bank Bankhaus Herstatt. The Committee, which has its headquarters at the Bank for International Settlements in Basel, was established with the goals of enhancing global banking supervision quality and regular cooperation among its member nations on banking supervision issues.

The Committee met for the first time in February 1975, and it has met three to four times a year ever since. Since its inception, 45 institutions from 28 jurisdictions have joined the Basel Committee, up from the G10. Starting with the Basel Concordat, which was first published in 1975 and has undergone numerous revisions since then? The Committee has established a number of international regulations for banks, most notably the landmark publications of the Basel I, Basel II, and Basel III capital adequacy agreements.

Basel I

• In 1988, BCBS introduced the Basel capital accord capital measurement system. Basel 1 was also a name for it.

• It focused almost entirely on credit risk.

• It established the structure for banks' risk-weighting and capital requirements.

• A minimum capital requirement of 8% of risk-weighted assets (RWA) was established.

• Assets with varying risk profiles are referred to as RWA. A personal loan without collateral, for instance, would be more risky than an asset backed by collateral. Capital can be broken down into two groups: Capital of Tier 1 and Capital of Tier 2 because it is the primary indicator of the bank's financial strength, tier 1 capital is the core capital of the bank. Paid-up capital and disclosed reserves, which are also referred to as retained earnings, make up the majority of core capital. Tier 2 capital also includes non-cumulative and non-redeemable preferred stock. Because it is less reliable than the first tier, it is used as supplemental funding. It consists of subordinate debt, preference shares, and reserves that have not been disclosed. India adopted the Basel 1 guidelines in 1999.

Basel II

• In June 2004, the BCBS released the Basel II guidelines, which were regarded as improved and reformed versions of the Basel I agreement.

• The committee refers to three pillars as the foundation of the guidelines

• Requirements for Adequacy of Capital: A minimum requirement of 8% of risk assets for capital adequacy should be maintained by banks.

• Review by Supervisor: This meant that banks had to come up with and implement better risk management strategies for keeping an eye on and dealing with all three kinds of risks they face: operational, market, and credit risks.

• Control of the Market: Due to this, stricter disclosure requirements are required. The central bank requires banks to regularly report their CAR, risk exposure, and other information.

Basel III

• In 2010, the Basel III guidelines were released

• The financial crisis of 2008 inspired the development of these guidelines

• Banks in developed economies were undercapitalized, over-leveraged, and more dependent on short-term funding, so the system needed to be strengthened further.

• Additionally, it was determined that neither the quantity nor the quality of the capital required by Basel II were sufficient to contain any additional risk.

• The majority of banking activities, such as trading books, will be made more capital-intensive by the Basel III standards.

• By focusing on four essential banking parameters, the guidelines aim to foster a more resilient banking system: funding, liquidity, capital, and leverage