Presentation On Basel Accords and Norms

Presented by M.Syed Roshana Farvin MBA I year

What is Basel?

Introduction
From 1965 to 1981 there were about eight bank failures (or 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." It is imperative that banks operate in a safe and sound manner to avoid failure. One way to ensure this is for governments to provide diligent regulation of banks. To meet this need is the Basel Committee on Bank Supervision (BCBS) is formed under BIS.

About BIS
The BIS is the worlds oldest international financial organization.

The Bank for International Settlements (BIS) is owned and operated by the central banks of numerous countries across the world. It is responsible for fostering international cooperation on monetary and financial policy.
The BIS also serves as a central bank to the central banks of its members.

The member nations of the G-10 established the Basel Committee on Bank Supervision (BCBS) in 1974 after Herstatt incident. The BCBS works under the Bank for International Settlements (BIS).

Basel Committee On Bank Supervision

The BCBS serves as a forum for its members to discuss issues and problems relating to bank regulation. The main purpose is the regulation of the bank capital.

Importance of Regulating bank capital

1. First, it protects against the risk of loss that is inherent in banks assets. 2. The second reason why capital is important is to protect against the volatility in a banks liabilities.

Basel Accords
1. Basel I (1988) 2. Basel II (2004) 3. Basel III (2010)

Basel 1
The Purpose of Basel I In 1988, the Basel I Capital Accord was created. The general purpose was to: 1. Strengthen the stability of international banking system. 2. Set up a fair and a consistent international banking system in order to decrease competitive inequality among international banks.

Two-Tiered Capital

Tier 1: Tier 1 capital includes stock issues and declared reserves, such as loan loss reserves. Tier 2: Tier 2 capital includes all other capital such as gains on investment assets, long-term debt with maturity greater than five years and hidden reserves .

Basel 1 focuses on credit risk and market risk.

Credit Risk

Credit Risk is defined as the risk weighted asset (RWA) of the bank, which are banks assets weighted in relation to their relative credit risk levels.
RiskWeight 0% 20% Asset Class Cash; assets involving the governments of OECD countries Assets involving banks located in OECD countries; cash items in the process of collection

50%
100%

Residential mortgage
Assets involving businesses; personal consumer loans; assets involving non-OECD governments

Market Risk: Market risk includes general market risk and specific risk. Pitfalls of Basel I Limited differentiation of credit risk Static measure of default risk Lack of recognition of portfolio diversification effects

Basel II Basel II, initially published in June 2004, was created to control how much capital banks need to put aside to guard against the types of financial and operational risks banks face.
Basel II has Three Pillars

Minimum capital is the technical, quantitative heart of

the accord. Banks must hold capital against 8% of their assets, after adjusting their assets for risk. Supervisor review is the process whereby national regulators ensure their home country banks are following

the rules.
Market Discipline:

Data provided by Supervisory review helps in detecting

strong organization for investing.

Basel II Charges for Three Risks

Basel III
Basel III (or the Third Basel Accord) is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk According to Basel Committee on Banking Supervision "Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector".

What are the objectives of the Basel III measures ?

improve the banking sector's ability to absorb

shocks arising from financial and economic stress. improve risk management. strengthen banks' transparency and disclosures.

3 Pillars of Basel Accord III

What are the Major Features of Basel III ?

(a) Better Capital Quality : One of the key elements of Basel 3 is the introduction of much stricter definition of capital. (b) Capital Conservation Buffer: Another key feature of Basel 3 is that now banks will be required to hold a capital conservation buffer of 2.5%. (c) Countercyclical Buffer: The countercyclical buffer has been introduced with the objective to increase capital requirements

(d) Leverage Ratio: Basel III rules include a leverage ratio to serve as a safety net. A leverage ratio is the relative amount of capital to total assets (not risk-weighted).