What are Basel I, Basel II and Basel III Norms / Accords ?

Basel Norms / Basel Accords. Friends you might have encountered these terms at least once during your preparation or while writing Bank Exams. You might have think that what is this Basel and what are these norms ? This post will give answers to all your questions. Read with little concentration, because its one of the very important topics for any banking exam.

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.