Presented By: Manish Gidwani 10 Kapil Israni 16

OVERVIEW
Central bank governors of G10 countries
Capital adequacy framework Risk weighted capital adequacy framework

FOUNDATION
Established on 17 May 1930 The BIS is the worlds oldest international financial organization Head office is in Basel, Switzerland and representative offices in Hong Kong SAR and in Mexico City.

The BIS currently employs around 550 staff from 50 countries.

LIST OF MEMBER CENTRAL BANKS

Algeria Argentina Australia Austria Belgium Bosnia and Herzegovina Brazil Bulgaria Canada Chile China Croatia The Czech Republic Denmark Estonia Finland France Germany Greece Hong Kong SAR Hungary

Iceland India Indonesia, Ireland Israel Italy Japan Korea Latvia Lithuania The Republic of Macedonia Malaysia Mexico the Netherlands New Zealand Norway the Philippines Poland Portugal Romania

Russia Saudi Arabia Singapore Slovakia Slovenia South Africa Spain Sweden Switzerland Thailand Turkey The United Kingdom The United States The European Central Bank

BASEL COMMITTEE ON BANKING SUPERVISION

A set of agreements
Regulations and recommendations on Credit

risk , market risk and operational risk

Purpose to have enough capital on account to

meet obligations and absorb unexpected losses

1. Credit risk
2. Market risk a) Interest risk b) Equity risk c) Foreign exchange risk 3. Large exposure risk

a) Counter party risk

PURPOSE OF BASEL 1
Strengthen

banking

the

stability

of

international system.

Set up a fair and a consistent international

banking system in order to decrease competitive inequality among international banks

STRUCTURE OF BASEL I
Minimum Capital Adequacy ratio was set at 8% and was

adjusted by a loans credit risk weight. 20%, 50% and 100%.

Credit risk was divided into 5 categories viz. 0%, 10%,

Commercial loans, for example, were assigned to the

100% risk weight category.

To calculate required capital, a bank would multiply the

assets in each risk category by the categorys risk weight and then multiply the result by 8%. Thus, a Rs 100 commercial loan would be multiplied by 100% and then by 8%, resulting in a capital requirement of Rs8.

BASEL NORMS V/S INDIAN BANKING SYSTEM

Basel Accord I. was established in 1988 and was

implemented by 1992 in India.

over 3 years banks with branches abroad were

required to comply fully by end March 1994 and the other banks were required to comply by end March 1996. stringent than Basel Committee stipulation of 8%.
rural banks have different RBI guidelines

RBI norms on capital adequacy at 9% are more Commercial Banks , Cooperative Banks and Regional

PITFALLS OF BASEL I
Negotiated risk weights
Overemphasis of trading account risk (not included

hedging, diversification, management techniques)

differences

in

risk

Static

measure of default risk The assumption that a minimum 8% capital ratio is sufficient to protect banks from failure does not take into account the changing nature of default risk.

 Potential counterparty risk

OBJECTIVES
Ensuring that capital allocation is more risk

sensitive;

Separating operational risk from credit risk, and

quantifying both;

Attempting to align economic and regulatory

capital more closely to reduce the scope for regulatory arbitrage.

STRUCTURE OF BASEL II

The three pillar approach

Pillar 1 sets out the minimum capital requirements firms will be required to meet to cover credit, market and operational risk. Pillar 2 sets out a new supervisory review process. Requires financial institutions to have their own internal processes to assess their overall capital adequacy in relation to their risk profile. Pillar 3 cements Pillars 1 and 2 and is designed to improve market discipline by requiring firms to publish certain details of their risks, capital and risk management as to how senior management and the Board assess and will manage the institution's risks.

The First Pillar Minimum Capital Requirement

Capital Adequacy Ratio is defined as the amount of regulatory capital to be maintained by a bank to account for various risks inbuilt in the banking system. The focus of Capital Adequacy Ratio under Basel I norms was on credit risk and was calculated as follows:

Capital Adequacy Ratio = Tier I Capital Tier II Capital Risk Weighted Assets
Basel Committee has revised the guidelines in the year June 2001 known as Basel II Norms.

Capital Adequacy Ratio in New Accord of Basel II: Capital Adequacy Ratio = Total Capital (Tier I Capital Tier II Capital) Market Risk(RWA) + Credit Risk(RWA) + Operation Risk(RWA) *RWA = Risk Weighted Assets

The Second Pillar Supervisory Review Process

The Third Pillar 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