What is this Basel ?
Basel is the name of a city in Switzerland. This city is is also the
headquarters of Bureau of International Settlement which is popularly
known as BIS. This BIS appointed a committee to supervise and to set
some standards for International Banks. This bank is lazy enough to
think about a new name for this committee. So it simply put the name of
the city which the committee normally meets and works. So this
committee became Basel Committee on Bank Supervision (BCBS). Now
this committee started issuing rules and regulations for Banks. These
rules are called Basel Norms / Accords. There are three Basel Norms,
namely Basel I, II and III.
Basel Norms / Accords (Basel I, II and III)
In simple words we can say that Basel Norm is a set of agreements set by
the BCBS which provides recommendations on banking regulations based on
three risks (capital risk, market risk and operational risk). The
purpose of Basel Norms is to ensure that financial institutions have
enough capital on account to meet obligations and absorb unexpected
losses.
Basel I Accord : This is the first Basel Accord, so we call it as Basel I. This was issued in 1988. This accord focused on the capital adequacy of financial institutions.
The capital adequacy risk (the risk that a financial institution will
be hurt by an unexpected loss), categorizes the assets of financial
institution into five risk categories (%, 10%, 20%, 50% and 100%). Banks
that operate internationally are required to have a risk weight of 8%
or less. India adopted Basel I Norms in the year 1999.
Basel II Acord : This is the second of the Basel Accords,
published in the year 2004. This consists of the recommendations on
Banking Laws and Regulations issued by BCBS. The purpose of Basel II
Acord is to create an international standard that banking regulators can
use when creating regulations about how much capital banks need to put
aside to guard against the types of financial and operational risks
banks face. According to Basel II Norms Banks should maintain a minimum
capital adequacy requirement of 8% of risk assets, banks were needed to
develop and use better risk management techniques in monitoring and
managing all the three types of risks that is credit and increased
disclosure requirements. This focuses on three main areas, those are
Minimum capital Requirements, Supervisory Review and Market Discipline.
This is to be fully implemented by the year 2015.
Read more about Basel I and Basel II norms here
Basel III Accord : Basel III guidelines were released in the year
2010. This is to enhance the banking regulatory framework. It builds on
the Basel I and Basel II documents adn seeks to improve the banking
sector's ability to deal with financial and economic stress, improve
risk management and strengthen the banks' transparency. These guidelines
were introduced in response to the financial crisis of 2008. So the
main focus of Basel III accord is to foster greater resilience at the individual bank level in-order
to reduce the risk of system wide shocks. In simple words we can say
that these norms mainly targeted to make most banking activities such as
their trading book activities more capital-intensive.All banks should
become Basel III compliant. The organization has set deadlines for this.
For international banks the deadline is 31st December 2018 and for
Indian banks the dead line is 31st March 2018.
