The Basel Accords are a series of banking regulations established by the Basel Committee on Banking Supervision. The document discusses the history and objectives of the Basel Accords. It explains that the Basel Committee was established in 1974 to improve banking supervision globally and set minimum capital requirements for banks. The Basel I Accord established the first capital requirements in 1988. Subsequent accords like Basel II and III enhanced regulations around capital adequacy ratios, risk management, disclosure, and liquidity to promote global financial stability.
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Basel 3
1.
2.
Basel, named after a city in Switzerland, where the Bureau of
International Settlements (BIS) is situated.
Its goal is to help its member banks to foster their financial
stability.
From 1965 to 1981 there were about eight bankruptcies in the
United States.
Bank failures were particularly prominent during the '80s, a
time which is usually referred to as the “savings and loan
crisis."
This was because the Banks throughout the world were
lending extensively, while countries' external indebtedness
was growing at an unsustainable rate.
3.
To prevent this risk, BIS launched the Basel Committee on Banking
Supervision (BCBS).
It comprised of central banks and supervisory authorities of 10 countries
(Belgium, Canada, France, Germany, Italy, Japan, Luxemburg, Netherlands
, Spain, Sweden, Switzerland, UK, US) which met in 1987 in
Basel, Switzerland for the first time
The committee drafted a first document to set up an international
'minimum' amount of capital that banks should hold.
This minimum is a percentage of the total capital of a bank, which is also
called the minimum risk-based capital adequacy.
In 1988, the Basel I Capital Accord (agreement) was created.
The Basel II Capital Accord follows as an extension of the former, and was
implemented in 2007.
4. 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
5.
Basel II was intended :
– To create an international standard for banking regulators.
– To maintain sufficient consistency of regulations.
– Protect the international financial system.
Addition of operational risk in the existing norms.
Defined new calculations of credit risk.
Ensuring that capital allocation is more risk
sensitive.
6. 1.
Better Evaluation of Risks.
2.
Better Allocation of resources.
3.
Supervisors should review each bank’s own
risk assessment and capital strategies.
4.
Improved Risk management.
5.
To strengthen international banking systems.
6
7.
8.
9. Pillar 1- Minimum Capital Requirements
Calculate
required capital.
Required capital based on:
Market risk.
Credit risk.
Operational risk.
Used to monitor funding concentration.
10. Pillar 2- Supervisory Review Process
Bank
should have strong internal process.
Adequacy
of capital based on risk evaluation.
11. Pillar 3 – Enhanced Disclosure
Provide
Intends
market discipline.
to provide information about banks
exposure to risk.
12.
Banks defined their own risk metrics and derivative
investments
Depends on good underlying data
Most of the institutional cogs in the credit crisis
aren’t covered
No independent standard.
Wrong assumptions in case of mortgage-related
risk calculations.
Inadequate level of capital required by the new
discipline
13.
The quality of capital.
Pro-cyclicality.
Liquidity risk.
Systemic banks.
14.
The G20 endorsed the new ‘Basel 3’ capital and liquidity
requirements.
Extension of Basel II with critical additions, such as a leverage
ratio, a macro prudential overview and the liquidity framework.
Basel III accord provides a substantial strengthening of capital
requirements.
Basel III will place greater emphasis on loss-absorbency capacity on a going
concern basis
The proposed changes are to be phased from 2013 to 2015
The creation of a conservation buffer could be set up by banks during the
period January 2016 to 2019.
14
15.
Special emphasis on the Capital Adequacy Ratio
◦ Capital Adequacy Ratio is calculated as –
CAR = (Tier 1 Capital + Tier 2 Capital) / Risk Weighted Assets
◦ Reducing risk spillover to the real economy
Comprehensive set of reform measures to
strengthen the banking sector.
Strengthens banks transparency and disclosures.
Improve the banking sectors ability to absorb
shocks arising from financial and economic
stress.
15
16.
Revised Minimum Equity & Tier 1 Capital
Requirements
Better Capital Quality
Backstop Leverage Ratio
Short term and long term liquidity funding
Inclusion of Leverage Ratio & Liquidity
Ratios
Rigorous credit risk management
Counter Cyclical Buffer
Capital conservation Buffer
17. 2009
2015 / 2018
Basel
P
I
L
L
P
R
I
1
L
L
A
P
R
I
2
L
L
A
(+)
OLD
* Quantity of
Capital to
Cover Risks
(CR + MKT +
OP)
III
NEW
* Quality of
Capital
OLD
* ICAAP
* SREP
* Capital
Conservation
Buffer
* Capital Charge
on OFF B/S...
3
A
(+)
NEW
* Leverage Ratio
* MIS as a Major
Management
Tool…
* Stress Tests
* Liquidity
Ratios (LCR +
NSFR)
R
* Countercyclical
Capital Buffer
(+)
OLD
* Information
on Risk
Management
* Timely
quantitative
& qualitative
information
NEW
* Compensation
Policy Disclosure
* Corporate
Governance Practices
* Pressure to fully
implement Pillar 3 +
IFRS7…
19. •Developing specifications for the new regulatory
requirements, such as the mapping of positions
(assets and liabilities) to the new liquidity and
funding categories in the LCR and NSFR
calculations
• The specification of the new requirements for
trading book positions and within the CCR
framework (e.g. CVA) as well as adjustments of
the limit systems with regard to the new capital
and liquidity ratios.
20. Crucial is the integration of new regulatory
requirements into existing capital and risk
management as some measures to improve new
ratios (e.g. liquidity ratios) might have a negative
effect on existing figures
21. •The technical challenges includes the availability
of data, data completeness, and data quality and
data consistency to calculate the new ratios.
• The financial reporting system with regard to the
new ratios and the creation of effective interfaces
with the existing risk management systems.
22. • The operational challenges includes stricter
capital definition lowers banks’ available capital.
At the same time the risk weighted assets (RWA)
for securitizations, trading book positions and
certain counterparty credit risk exposures are
significantly increased.
• The
stricter
capital
requirements,
the
introduction of the LCR and NSFR will force
banks to rethink their liquidity position, and
potentially require banks to increase their stock
of high-quality liquid assets and to use more
stable sources of funding.
23. •Basel III also introduces a non-risk based
leverage ratio of 3 percent. Group1 banks are
failed in maintaining the this leverage ratio
•The
banks will experience increased
pressure on their Return on Equity (RoE) due
to increased capital and liquidity costs, which
along with increased RWAs will put pressure
on margins across all segments
25. • High capital ratios at 14.4% in June 2010 which will fall to
11.7%. Tier 1 will fall from 10% to 9% and common equity
from 8.5% to 7.4%.
Most of deductions are already mandated by RBI.
Banks mostly follow a retail business model and do not
depend on wholesale funds.
Indian banks are generally not as highly leveraged as their
global counterparts.
The leverage ratio of Indian banks would be comfortable.
26.
Public sector banks-needs Rs.1 trillion over 10-5 years.
Some public sector banks are likely to fall short of the revised
core capital adequacy requirement.
Increase in the requirement of capital will affect the ROE of
the Public banks.
Notes de l'éditeur
Key challengesIndian banks on average have Tier 1 capital ratios of around 7.5% to 8%, which prima facie meet the proposed Basel III requirementsBUT: beware of definitional changesTransition to Basel III may not impact earnings much, but the upside potential associated with higher leveraging would decline. Further, as the countercyclical buffer has to be set periodically by the RBI, this could introduce an element of variation in lending rates and/or the ROE of banksImplementation of the liquidity coverage ratio (LCR) from 2015 may necessitate banks to maintain additional liquidity; also some assumptions on the rollover rates and the required liquidity for committed lines may be more stringent. However, considering the period of one month and the fact that most Indian banks have upgraded their technology platforms, the transition to LCR may not be a very difficult oneWhile the proposal to make deductions “only if such deductibles exceed 15% of core capital” would provide some relief to Indian banks , the stricter definition of “significant interest” and the suggested 100% deduction from the core capital (instead of 50% from Tier I and 50% from Tier II) could have a negative impact on the core capital of some banks.
