Ashish Chaurasia

T.Y BMS-B / 11B706

International Finance
Assignment

BASEL III OBJECTIVES:
Bank-level, or micro prudential regulations, which will help to increases the ability of
individual banking institutions to manage stress.
System level, macro prudential regulations, which will govern the approach of the
regulators and the entire banking sector towards risk management.
The framework of Basel III was accepted in September 2009 and concrete proposals were
finalized in December 2009. These proposals have been endorsed by the G20 leaders.
BASEL III APPROACH:
The new norms are based on renewed focus of central bankers on macro-prudential
stability. The global financial meltdown following the crisis in the US sub-prime market has
prompted this change in approach. The previous guidelines, known as Basel II Norms, focused
on macro-prudential regulation. Global regulators are now focusing on financial stability of the
system as a whole including micro regulation of individual banks.
IMPACT ON INDIAN BANKS:
The RBI does not expect the Indian banking system to face any difficulty in meeting the
proposed new capital rules, both in terms of the overall capital requirement and the quality of
capital because of 30 June 2010 the Indian banking sector had already achieved the required
capital adequacy levels.
Advantages
A. Lower economic cost:
Banks are highly leveraged institutions and function as the center of the credit
intermediation process. A destabilized banking system affects the availability of credit
and liquidity to the economy and leads to loss in economic output.
B. Reduced frequency of crisis:
The cost of banking crisis are extremely high and so is their frequency. Since 1985, there
have been more than 30 major banking crisis in Basel Committee-member countries. The
common elements in all these cases have been:
Excess liquidity chasing high returns
Inadequate credit assessment
Inadequate underwriting risk assessment
Inadequate risk evaluation, and
Excess leveraging of capital resources

C. Sustainable long term growth:
The objective of the Basel III reforms is to reduce the probability and intensity of future
crises. This involves costs arising from higher regulatory capital and liquidity
requirements and more intensive supervision. Increasing the stability of the banking and
financial system involves a trade-off, in which these costs are more than offset by long-
term gain in the form of sustainable growth.
Disadvantages
Banks would be required to put in place automated reporting systems to meet the
reporting requirements.
Banks will be required to consolidate and maintain a centralized risk data warehouse.
Customized risk measurements and liquidity requirement ratios for different variables
will have to be developed.
Conclusion
This regulations will result in a safer financial system, with slightly lower economic
growth. They should result in safer and stable markets for both debt and stock market investors.