NARASIMHAM COMMITTEE REPORT I - 1991

Reduction in the SLR and CRR Phasing out directed credit programme Interest rate determination Structural reorganizations of the banking sector Establishment of the ARF tribunal

Removal of dual control

Banking autonomy

NARASHIMA COMMITTEE 1998

Autonomy in banking
Reform in the role of RBI Stronger banking system Non-performing assets Capital adequacy and tightening of provisioning

norms Entry of foreign banks

WHAT IS BASEL I
It defines a banks capital as two types:
Core (or tier I) capital Supplementary (or tier II) capital comprising

LOOPHOLES OF BASELI
Basel I accord succeeded in raising total level of equity

capital in the system. However, it also pushed unintended consequences. Since it does not differentiate risks very well, it perversely encouraged risk seeking. All loans given to corporate borrowers were subject to the same capital requirement, without taking into account ability of the counterparties to repay. It ignored credit rating, credit history, risk management and corporate governance structure of all corporate borrowers. All were treated as private corporations. It also promoted loan securitization that led to the unwinding in the subprime market.

BASEL II
A set of international banking regulations put forth

by the basel committee on bank supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk.

Objectives of basell II
create an international standard that banking regulators can use when creating regulations about capital International standard can help protect the international financial system from possible problems of major bank or a series of banks collapse. Greater the risk greater the amount of capital bank needs to hold to safeguard its solvency and overall economic stability Basel ii attempts to accomplish this by setting up rigorous risk and capital management requirements to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through lending and investment practices
To

BASEL II
Basel II stands on three pillars:

 Pillar 1 : Minimum capital requirement

Institution's total regulatory capital must be at

least 8% (ratio same as in Basel I) of its risk weighted assets, based on measures of THREE RISKS

Pillar 2 : Supervisory Review

Covers Supervisory Review Process, describing principles

for effective supervision. Supervisors obliged to evaluate activities, corporate governance, risk management and risk profiles of banks to determine whether they have to change or to allocate more capital for their risks (called Pillar 2 capital)
Deals with regulatory response to the first pillar, giving

regulators much improved 'tools' over those available to them under Basel I Also provides framework for dealing with all the other risks a bank may face, such as Systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk It gives banks a power to review their risk management system.

Pillar 3 : Market Discipline

Covers transparency and the obligation of banks to

disclose meaningful information to all stakeholders Clients and shareholders should have sufficient understanding of activities of banks, and the way they manage their risks

Conclusion:
Basel II Framework lays down a more comprehensive

measure and minimum standard for capital adequacy

Seeks to improve on existing rules by aligning regulatory

capital requirements more closely to underlying risks that banks face. In addition, it intends to promote a more forward-looking approach to capital supervision, that encourages banks to identify the present and future risks, and develop or improve their ability to manage them. Hence intended to be more flexible and better able to evolve with advances in markets and risk management practices. Basel II Accord attempts to fix glaring problems with the original accord. It does this by more accurately defining risk, but at the cost of considerable rule complexity