Basel III (Basel I, II & Basel Committee)

Neeraj Chauhan Haresh Ashar Keyur Shah Keshav Trehan

Overview of Presentation

Background and Objectives of Basel Committee History of Basel I History of Basel II Basel III Summery of Upcoming Changes Expected Impact on banking system

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Basel Committee on Banking Supervision (BCBS)

Committee of banking supervisory authorities

Established by the central bank governors of ten countries in 1974

Supported by a Secretariat staff of 17 professionals

Secretary General 2 Deputy Secretaries General 1 Senior Member of the Secretariat 3 other Members of the Secretariat

BCBS meets four times per year

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Basel Committee on Banking Supervision (BCBS)

The task of supervision is to ensure that banks operate in a safe and sound manner and they hold capital and reserves sufficient to support the risks that arise in their business.

Supervisory Guidelines Cross-border Banking Supervision International standards on capital reservs Enhance understanding of key supervisory issues Improve the strength of the financial systems Responses to the financial crisis
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Who is Responsible for Good Governance in Banks?

Bank boards and senior management

Bank supervisors (Guidance & assessing bank practices)

Others

Shareholders Depositors & customers Employees Auditors Banking industry associations Credit rating agencies Governments, securities regulators and stock exchanges
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Objectives of Basel Committee

Provide guidance to banks on sound corporate governance and proactive practices

Ensure corporate governance used as an element of depositor protection and their implementation Maximum sustainable economic growth governance and management worldwide and strengthen risk

Promote forward looking provisioning and capital buffers Bring to the attention of boards and senior management any problems they detect through supervisory efforts
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BASEL I - 1988 Basel Accord

The round of deliberations by central bankers from around the world

In 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks Also known as the 1988 Basel Accord

Enforced by law in the Group of Ten (G-10) countries in 1992

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BASEL I - 1988 Basel Accord

Because of messy () liquidation of a Cologne-based HERSTATT Bank by German Regulators in 1974, Basel Committee (BCBS) in Basel, Switzerland, came into being G-10 nations decided to form, the Basel Committee on Banking Supervision, under the auspices / Patronage of the Bank of International Settlements (BIS) located in Basel, Switzerland

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Main framework of BASEL I

Focused primarily on Credit Risk Classification and Grouping of Bank Assets Into 5 categories according to Credit Risk Banks with international presence required to hold capital = 8% of risk-weighted assets helped large banks hedge lending risk and allowed banks to lower their own risk Currently 13 countries are Member to Basel I Over 100, have adopted the principles prescribed under Basel I

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BASEL I G-10 Countries

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BASEL I Outmoded

Now viewed widely as out of fashion, useless or Obsolete

Basel II and Basel III are in the process of implementation by several countries

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BASLE II- BACKGROUND

Basel 2 is the new capital accord signed in June 2004 at Bank for International Settlement located at Basel, Switzerland
The focus in Basel 2 is the risk determination and quantification of credit risk, market risk and operational risk faced by banks

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What is Basel II?

A set of banking regulations put forth by the Basel Committee on Bank Supervision, which regulates finance and banking internationally Basel II attempts to integrate Basel capital standards with national regulations, by setting the minimum capital requirements of financial institutions with the goal of ensuring institution liquidity

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BASEL II

[Basel II] is intended to align regulatory capital requirements more closely with underlying risks, and to provide banks and their supervisors with several options for the assessment of capital adequacy. -- William McDonough

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Three Pillars

First Pillar

Credit risk Operational risk Market risk

Second Pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I

Third Pillar

This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution
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Basel III

Source Price Waterhouse Coopers

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Sample Issues-1

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Sample Issues-2

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Expected Impact

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