Basel Accords

1. BASEL & its’ current
implementation
in Bangladesh
Prepared by Md Masudur Rahman
ID : 2010233207

2. What is BASEL?
Internationally well known framework for banking system
that ensures strong basement of capital adequacy. Basically
it is a full set of standard sets out by BCBS Basel
Committee on Banking supervision. Members of BCBS has
agreed to fully implement these standards and apply them
to the internationally active banks in their jurisdiction

3. Standards:
CAP Definition of capital
This standard describes the criteria that bank capital instruments must meet to be eligible to
satisfy the Basel capital requirements, as well as necessary regulatory adjustments and
transitional arrangements.
RBC Risk-based capital requirements
This standard describes the framework for risk-based capital requirements.
CRE Calculation of RWA for credit risk
This standard describes how to calculate capital requirements for credit risk.
MAR Calculation of RWA for market risk
This standard describes how to calculate capital requirements for market risk and credit
valuation adjustment risk.

4. OPE Calculation of RWA for operational risk
This standard describes how to calculate capital requirements for operational risk.
LEV Leverage ratio
This standard describes the simple, transparent, non-risk-based leverage ratio. This measure
intends to restrict the build-up of leverage in the banking sector and reinforce the risk-based
requirements with a simple, non-risk-based "backstop" measure.
LCR Liquidity Coverage Ratio
This standard describes the Liquidity Coverage Ratio, a measure which promotes the short-term
resilience of a bank's liquidity risk profile.
NSF Net stable funding ratio
The net stable funding ratio requires banks to maintain a stable funding profile in relation to the
composition of their assets and off-balance-sheet activities.

5. Purposes of BASEL
To absorb risk
To maintain certain level of capital adequacy ratio
To work as a governing authority of banks

6. BASEL :1
Basel I is a set of international banking regulations established by the Basel Committee on Banking Supervision (BCBS). It
prescribes minimum capital requirements for financial institutions, with the goal of minimizing credit risk.
Purpose:
1)Significant increase in Capital Adequacy Ratios of internationally active banks.
2)Competitive equality among internationally active banks.
3)Augmented management of capital.
4)A benchmark for financial evaluation for users of financial information.
5)Risk Management (Market, credit, operational)

7. Requirements for BASEL 1
The Basel I classification system groups a bank's assets into five risk categories, labeled with the percentages
0%, 10%, 20%, 50%, and 100%. A bank's assets are assigned to these categories based on the nature of the
debtor.
The 0% risk category consists of cash, Central Bank and government debt, and any Organisation for Economic
Co-operation and Development (OECD) government debt. Public sector debt can be placed in the 0%, 10%,
20%, or 50% category, depending on the debtor.

8. BASEL 2
Building on Basel I, Basel II provided guidelines for the calculation of minimum regulatory capital ratios and confirmed the requirement that banks maintain a capital
reserve equal to at least 8% of their risk-weighted assets.
#It expanded the rules for minimum capital requirements established under Basel I
#Based on three main pillar:
minimum capital requirements:8% capital adequacy ratio
regulatory supervision:to deal with systemic risk, liquidity risk, and legal risks, among others.
market discipline: intended to foster greater transparency by disclosing banks' risk exposures, risk assessment processes, and capital adequacy
Minimum capital requirements play the most important role in Basel II and obligate banks to maintain certain ratios of capital
to their risk-weighted(at least 8% of the risk-weighted assets).

9. Functions of BASEL 2:
Basel II divides the eligible regulatory capital of a bank into three tiers.The higher the tier, the more secure its assets.
Tier 1 capital:
Represents the bank's core capital and is composed of common stock, as well as disclosed reserves and certain other assets. At least 4% of the bank's capital reserve must be in the form of
Tier 1 assets
#equity capital
#disclosed reserve
#easily convertible
Tier 2 capital:considered supplementary capital and consists of items such as revaluation reserves, hybrid instruments, and medium- and long-term subordinated loans
#supplimentary capital
#undisclosed capital
Tier 3 capital: banks hold tier 3 capital to support their market risk, commodities risk, and foreign currency risk, derived from trading activities
#lower-quality
# unsecured
#subordinated debt.

10. Criticism of BASEL 1&2
Basel I has been criticized for hampering bank activity and slowing growth in the overall world economy by making less capital available
for lending. Critics on the other side of that argument maintain that the Basel I reforms did not go far enough. Both Basel I and Basel II
were faulted for their failure to avert the financial crisis and Great Recession of 2007 to 2009, events that became a catalyst for Basel III.
Did Basel II Replace Basel I?
Basel II built upon Basel I, refining and clarifying some of its rules as well as adding new ones, but did not replace it altogether.
What Was Wrong With Basel II?
The beginning of the subprime mortgage meltdown in 2007 and the ensuing worldwide financial crisis showed that the regulations
created under Basel I and Basel II were inadequate for curtailing the risks that some banks were taking, and the dangers they posed to the
worldwide financial system.

11. BASEL 3
designed to mitigate risk within the international banking sector by requiring banks to maintain certain leverage ratios and
keep certain levels of reserve capital on hand. Begun in 2009, it is still being implemented as of 2022.
Leverage Ratio:TOTAL OUTSTANDING DEBT/SHAREHOLDER EQUITY(the lower the
safer)
# how much capital comes in the form of debt (loans)
# ability of a company to meet its financial obligations
reserve capital(tier 1 capital) : how much liquid capital (easily liquidable assets) they must keep on hand, concerning their
overall holdings
# Under the Basel III accords, tier 3 capital is being completely abolished.
#Basel III introduced new rules requiring that banks maintain additional reserves known as countercyclical capital
buffers,essentially a rainy day fund for banks. These buffers, which may range from 0% to 2.5% of a bank’s RWAs, can be
imposed on banks during periods of economic expansion.

12. Purpose of BASEL 3
# to improve regulation, supervision, and risk management within the worldwide banking sector
#an repetitive step in the ongoing effort to enhance the banking regulatory framework
# to address some of the regulatory shortcomings of Basel I and Basel II
BASEL 3 stated 3 pillars:
1. Credit Risk :refers to the probability of a borrower not repaying the loan and other contractual obligations. Delays in the payment of the loan also
comes under credit risk.
2. Market risk:refers the probability of occurrence of losses on financial investments caused by adverse price movements. Decline in the price of shares
bought by a bank is an example for market risk. Poor returns from the securities invested by a bank is another example for market risk.
3. Operational Risk:refers to the risk of losses related with the weak or faulty operations of the bank. Internal fraud as happened in the case of Punjab
National Bank or faulty governance practices etc. may bring losses to the bank and thus are examples for operational risk.

13. Implementation of BASEL III in Bangladesh

14. Capital Conservation Buffer
The capital conservation buffer was introduced to ensure that banks have an additional layer of usable capital that can be
drawn down when losses are incurred. The buffer was implemented in full as of 2019 and is set at 2.5% of total risk-weighted
assets. It must be met with Common Equity Tier 1 (CET1) capital only, and it is established above the regulatory minimum
capital requirement.
The countercyclical capital buffer
The countercyclical capital buffer (CCyB) aims to protect the banking sector from periods of excess aggregate credit growth
that have often been associated with the build-up of system-wide risks. The CCyB framework became fully effective as of
2019.
Basel III requires that the CCyB be activated and increased by authorities when they judge aggregate credit growth to be
excessive and to be associated with a build-up of system-wide risk. The buffer would subsequently be drawn down in a
downturn to help ensure that banks maintain the flow of credit in the economy.