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Introduction
On June 26, 1974, German regulators forced the troubled Bank Herstatt into liquidation. That day a number of banks had released payment to Herstatt in Frankfurt in exchange for US$ that was to be delivered in New York. Because of the time- zone differences, Herstatt ceased operation between the times of the respective payments. The counter party banks did not receive their US$ payments. Responding to the cross-jurisdictional implications of Herstatt debacle, the G-10 countries formed a standing committee under the auspices of Bank of International Settlements (BIS) Called the Basel Committee or (Basle Committee
G-10 Countries
Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom and the United States
BASEL II
In June 1999 the Basel committee on banking supervision issued a new consultative paper on New Capital Adequacy framework. After conducting three quantitative impact studies to assess those proposals, the finalized Basel Accord called International Convergence of Capital Measures and Capital Standards: a Revised Framework, was adopted on June2004
BASEL II
Basel II is based on three pillars 1. Minimum capital requirement for banks 2. Supervision to review banks capital adequacy and internal assessment processes 3. Use of Market Discipline for greater transparency and disclosure encouraging best international practices
BASEL II
Basel II reflects more risk sensitive requirements of banks with greater attention to supervision and market discipline. The revised accord has retained the minimum requirement of 8% of capital to risk weighted assets. Capital --------------------------------------------------- 8% Credit risk + market risk + operational risk The operational risk has been added to take note of increasing globalization, enhanced use of technology, product innovations and growing complexity in operations.
Operational Risk
Operational risk has been defined as the risk of loss resulting from inadequate or failed internal processes, people and system or from external events.
Credit Rating
Another major change is that under the new accord, risk weights are to be determined on the basis of ratings assigned by independent external credit rating agencies. At present, credit rating is required for debt instruments only but under the new framework, credit rating will be extended to bank loans also.
Market Discipline
To strengthen the safety and soundness of the system, the requirement of disclosure by banks has been strengthened. For instance, banks will have to disclose additional details of the way in which they calculate their capital adequacy, their risk management strategies and practices, and also credit assessment institutions that they use for the risk weighting of their assets The disclosure relating to comprehensive risk exposures would include credit risk, market risk, liquidity risk, operational risk, legal and other risks as well as accounting policies and information on corporate governance.
Consolidation
The immediate impact of Basel II will be that the banks will need additional capital to cover market risk and operational risk besides credit risk. Also, banks will need more capital to support expansion. The stronger banks will be able to meet their need for additional capital by tapping the market- both domestic and international or by ploughing back profits. However the weaker banks may need to merge with banks having surplus capital or those with ability to raise capital from the market.
Impact on profitability
Competition among banks for prime customers will intensify, pushing down spread even further. Additional cost on account of rating as also cost of putting in place risk management system, technology infrastructure, MIS for building adequate database will impact profitability.
Impact on Borrowers
While there will be reduction in borrowing cost for prime borrowers, the cost of borrowing for non-prime / unrated borrowers will go up.
Push to retail
With almost 70% of Indias population under 30 years of age, less than 5% of GDP in personal and housing finance and a booming services sector, there is no doubt the demographic dynamics will drive retail banking in India in the years ahead.
HR Issues
IT, risk management and increasing sophistication in other areas will push up the demand for skilled and specialized staff. At the same time, the need to redeploy, retrain and reskill existing staff remain the major challenge before the Indian banking industry.
BASEL-III
December 17, 2009 Basel Committee issued two consultative documents:
Strengthening the resilience of the banking sector International framework for liquidity risk measurement, standards and monitoring
BASEL-III
The proposals were finalized and published on December 16, 2010:
Basel III: A global regulatory framework for more resilient banks and banking systems Basel III: International framework for liquidity risk measurement, standards and monitoring
BASEL-III
Objectives
Improving banking sectors ability to absorb shocks Reducing risk spillover to the real economy