Basel Norms

1. BASEL COMMITTEE
& BASEL NORMS
Submitted to:
Prof. Ram Krishnan
Submitted by:
Nishant Haran
FPB1517/007
Section-B

2. HISTORY OF THE BASEL COMMITTEE
• The breakdown of the Bretton Woods system of managed exchange
rates in 1973 soon led to casualties.
• On 26 June 1974, West Germany's Federal Banking Supervisory Office
withdrew Bankhaus Herstatt's banking licence after finding that the
bank's foreign exchange exposures amounted to three times its capital.
• In October the same year, the Franklin National Bank of New York also
closed its doors after racking up huge foreign exchange losses.
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3. • Three months later, in response to these and other disruptions in the
international financial markets, the central bank governors of the G10
countries established a Committee on Banking Regulations and
Supervisory Practices.
• Later renamed as the Basel Committee on Banking Supervision.
• The Committee was designed as a forum for regular cooperation between its
member countries on banking supervisory matters.
• Its aim was and is to enhance financial stability by improving supervisory know how
and the quality of banking supervision worldwide.
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HISTORY OF THE BASEL COMMITTEE

4. BASEL I: THE BASEL CAPITAL ACCORD
• Capital adequacy soon became the main focus of the Committee's
activities.
• In the early 1980s, the onset of the Latin American debt crisis
heightened the Committee's concerns that the capital ratios of the
main international banks were deteriorating at a time of growing
international risks.
• There was a strong recognition within the Committee of the
overriding need for –
• A multinational accord to strengthen the stability of the international banking system
and
• To remove a source of competitive inequality arising from differences in national capital
requirements.
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5. • A capital measurement system commonly referred to as the Basel Capital
Accord (or the 1988 Accord) was approved by the G10 Governors and
released to banks in July 1988.
• The Accord called for-
• A minimum capital ratio of capital to risk-weighted assets of 8% to be implemented by the
end of 1992.
• Assets of banks were classified and grouped in five categories according to
credit risk
• 0% Ex: Bullion
• 20% Ex: Mortgaged-Backed Securities
• 50% Ex: Municipal Revenue Bonds
• 100% Ex: Corporate Debt
• Some assets given No rating
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BASEL I: THE BASEL CAPITAL ACCORD

6. CAPITAL ADEQUACY RATIO (CAR)
• Expressed as a percentage of a bank's risk weighted credit
exposures.
• The tier 1 capital ratio = tier 1 capital / all RWA
• The total capital ratio = (tier 1 + tier 2 + tier 3 capital) / all
RWA
• CAR = Capital / Risk >= 8%
• Ratio is used to protect depositors and promote the stability and
efficiency of financial systems around the world.
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7. TOTAL
CAPITAL
( AT LEAST
8% OF
TOTAL RISK-
WEIGHTED
ASSETS)
TIER 1
CAPITAL
• The book
Value of its
stock +
retained
earnings
• At least 4% of
total risk-
weighted
assets
TIER 2
CAPITAL
• Loan-loss
reserves +
subordinated
debt.
TIER 3
CAPITAL
• Include a
greater number
of
subordinated
issues
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8. BASEL II: THE NEW CAPITAL FRAMEWORK
• In June 1999, the Committee issued a proposal for a new capital
adequacy framework to replace the 1988 Accord. This led to the
release of the Revised Capital Framework in June 2004.
• Generally known as "Basel II", the revised framework comprised
three pillars, namely:
• Minimum capital requirements, which sought to develop and expand the standardised rules set
out in the 1988 Accord;
• Supervisory review of an institution's capital adequacy and internal assessment process; and
• Effective use of disclosure as a lever to strengthen market discipline and encourage sound
banking practices.
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9. THE BASEL II FRAMEWORK
PILLAR 1:
MINIMUM
CAPITAL
REQUIREMENTS
PILLAR 3:
MARKET
DISCIPLINE
PILLAR 2:
SUPERVISORY
REVIEW
• Credit Risk
• Market Risk
• Operational Risk
• A guiding principle for
banking supervision
Disclosure
requirements
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10. PILLAR 1: MINIMUM CAPITAL REQUIREMENTS
• The calculation of regulatory minimum capital requirements:
• Total amount of capital/(Total risk – Weighted assets ) >= 8%
• Definition of capital:
• Tier 1 capital + Tier 2 capital + adjustments
• Total risk-weighted assets are determined by:
• Multiplying the capital requirements for market risk and operational risk by 12.5.
• Adding the resulting figures to the sum of risk-weighted assets for credit risk.
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11. PILLAR 2: SUPERVISORY REVIEW
• Principle 1: Banks should have a process for assessing and
maintaining their overall capital adequacy.
• Principle 2: Supervisors should review and evaluate banks
internal capital adequacy assessments and strategies.
• Principle 3: Supervisors should expect banks to operate above the
minimum regulatory capital ratios.
• Principle 4: Supervisors should intervene at an early stage to
prevent capital from falling below the minimum levels.
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12. PILLAR 3: MARKET DISCIPLINE
• The purpose of pillar three is to complement the pillar one and
pillar two.
• Develop a set of disclosure requirements to allow market
participants to assess information about a bank’s risk profile and
level of capitalization.
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13. BASEL III: INTERNATIONAL FRAMEWORK FOR LIQUIDITY
RISK MEASUREMENT, STANDARDS AND MONITORING
• A new capital framework revises and strengthens the three pillars
established by Basel II. The accord is also extended with several
innovations, namely:
• An additional layer of common equity
• A countercyclical capital buffer
• Proposals to require additional capital and liquidity to be held by banks whose
failure would threaten the entire banking system
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14. KEY FEATURES
• Capital requirements
• Leverage ratio
• Liquidity Requirements
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Thank you all for listening to me so patiently