basel 1 banking

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A presentation on««..A presentation on««..

BASEL 1Prepared by:

Palak & Ripal



INTRODUCTION TO BASELINTRODUCTION TO BASEL

COMMITT

EECOMMITT

EEy A Group of eleven nations decided toform a co-operative council to harmonizebanking standards and regulations

internationally within the member states.y Goal:

Extend regulatory coverage.

Promote adequate banking supervision.Strict supervision.

� It can not enact legally binding standards.



DEFINITIONDEFINITION

y A set of international banking regulations

put forth by the Basel Committee on

Bank Supervision, which set out the

minimum capital requirements of financialinstitutions with the goal of minimizing

credit risk. Banks that operate

internationally are required to maintain aminimum amount (8%) of capital based on

a percent of risk-weighted assets



SCOPE O BASEL 1SCOPE O BASEL 1

y Created for G-10 which are developednations and not for emerging economies.

y It only provides information on adequate

capital to guard against risk of creditworthiness other areas such asfluctuation in nation's currency,macroeconomic downturn, interest rate

changes etc are not covered.y It only proposes minimum capital

requirement for internationally active banks.



FOUR PILLORS OF BASEL 1FOUR PILLORS OF BASEL 1

1) The constituents of capital

CONSTITUENT

Banker·s reserve

Tier 1 Tier 2

How muchreserve to be

hold




2) Risk weighing

It divides bank·s assets into five categories

0% - riskless 20% - low risk

50% - moderate risk

100% - high risk variable depending on central bank·s

discretion



0% - cash, central bank and government debtand any OECD government debt

0%, 10%, 20% or 50% - public sector debt20% - development bank debt, OECD bank

debt, OECD securities firm debt, non-OECDbank debt (under one year maturity) and

non-OECD public sector debt, cash incollection

50% - residential mortgages

100% - private sector debt, non-OECD bank debt (maturity over a year), real estate, plantand equipment, capital instruments issued atother banks




3) A target standard ratio

It combines pillar 1 and pillar 2.

I

t sets a universal standard whereby 8% of a bank·s risk-weighted assets must be

covered byTier 1 andTier 2 capital

reserves.

Tier 1 capital must cover 4% of a bank·srisk-weighted assets.




4)Transitional and implementing

agreements

sets the stage for the implementation of

the Basel Accords.

Each country·s central bank is requested

to create strong surveillance and

enforcement mechanisms to ensure theBasel Accords are followed



CRITICISMS:CRITICISMS:

y Narrow scope.

y Weak influence

y Inability to publicize in lay-men·s terms.

y Oversell of the terms of BASEL 1

y Wide breath and absoluteness of BASEL

1·s risk weighing.

y Application to emerging economies

basel 1 banking

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