basel committee & basel norms
TRANSCRIPT
BASEL COMMITTEE & BASEL NORMS
Submitted to:Prof. Ram Krishnan
Submitted by:Nishant HaranFPB1517/007Section-B
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HISTORY OF THE BASEL COMMITTEE
• The breakdown of the Bretton Woods system of managed exchange rates in 1973 soon led to casualties.
• On 26 June 1974, West Germany's Federal Banking Supervisory Office withdrew Bankhaus Herstatt's banking licence after finding that the bank's foreign exchange exposures amounted to three times its capital.
• In October the same year, the Franklin National Bank of New York also closed its doors after racking up huge foreign exchange losses.
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• Three months later, in response to these and other disruptions in the international financial markets, the central bank governors of the G10 countries established a Committee on Banking Regulations and Supervisory Practices.
• Later renamed as the Basel Committee on Banking Supervision.• The Committee was designed as a forum for regular cooperation between its
member countries on banking supervisory matters. • Its aim was and is to enhance financial stability by improving supervisory know how
and the quality of banking supervision worldwide.
HISTORY OF THE BASEL COMMITTEE
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BASEL I: THE BASEL CAPITAL ACCORD
• Capital adequacy soon became the main focus of the Committee's activities.
• In the early 1980s, the onset of the Latin American debt crisis heightened the Committee's concerns that the capital ratios of the main international banks were deteriorating at a time of growing international risks.
• There was a strong recognition within the Committee of the overriding need for –• A multinational accord to strengthen the stability of the international banking system
and • To remove a source of competitive inequality arising from differences in national capital
requirements.
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• A capital measurement system commonly referred to as the Basel Capital Accord (or the 1988 Accord) was approved by the G10 Governors and released to banks in July 1988.
• The Accord called for-• A minimum capital ratio of capital to risk-weighted assets of 8% to be implemented by the end
of 1992.
• Assets of banks were classified and grouped in five categories according to credit risk• 0% Ex: Bullion• 20% Ex: Mortgaged-Backed Securities• 50% Ex: Municipal Revenue Bonds• 100% Ex: Corporate Debt• Some assets given No rating
BASEL I: THE BASEL CAPITAL ACCORD
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CAPITAL ADEQUACY RATIO (CAR)
• Expressed as a percentage of a bank's risk weighted credit exposures.
• The tier 1 capital ratio = tier 1 capital / all RWA
• The total capital ratio = (tier 1 + tier 2 + tier 3 capital) / all RWA
• CAR = Capital / Risk >= 8%
• Ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.
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TOTAL CAPITAL
( AT LEAST 8% OF TOTAL
RISK-WEIGHTED
ASSETS)
TIER 1 CAPITAL• The book Value
of its stock + retained earnings
• At least 4% of total risk-weighted assets
TIER 2 CAPITAL• Loan-loss
reserves + subordinated debt.
TIER 3 CAPITAL• Include a greater
number of subordinated issues
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BASEL II: THE NEW CAPITAL FRAMEWORK
• In June 1999, the Committee issued a proposal for a new capital adequacy framework to replace the 1988 Accord. This led to the release of the Revised Capital Framework in June 2004.
• Generally known as "Basel II", the revised framework comprised three pillars, namely: • Minimum capital requirements, which sought to develop and expand the standardised rules set
out in the 1988 Accord; • Supervisory review of an institution's capital adequacy and internal assessment process; and • Effective use of disclosure as a lever to strengthen market discipline and encourage sound
banking practices.
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THE BASEL II FRAMEWORK
PILLAR 1: MINIMUM CAPITAL
REQUIREMENTS
PILLAR 3: MARKET
DISCIPLINE
PILLAR 2: SUPERVISORY
REVIEW
• Credit Risk• Market Risk• Operational Risk
• A guiding principle for banking supervision
Disclosure requirements
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PILLAR 1: MINIMUM CAPITAL REQUIREMENTS
• The calculation of regulatory minimum capital requirements:
• Total amount of capital/(Total risk – Weighted assets ) >= 8%
• Definition of capital:• Tier 1 capital + Tier 2 capital + adjustments
• Total risk-weighted assets are determined by:• Multiplying the capital requirements for market risk and operational risk by 12.5.• Adding the resulting figures to the sum of risk-weighted assets for credit risk.
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PILLAR 2: SUPERVISORY REVIEW
• Principle 1: Banks should have a process for assessing and maintaining their overall capital adequacy.
• Principle 2: Supervisors should review and evaluate banks internal capital adequacy assessments and strategies.
• Principle 3: Supervisors should expect banks to operate above the minimum regulatory capital ratios.
• Principle 4: Supervisors should intervene at an early stage to prevent capital from falling below the minimum levels.
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PILLAR 3: MARKET DISCIPLINE
• The purpose of pillar three is to complement the pillar one and pillar two.
• Develop a set of disclosure requirements to allow market participants to assess information about a bank’s risk profile and level of capitalization.
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BASEL III: INTERNATIONAL FRAMEWORK FOR LIQUIDITY RISK MEASUREMENT, STANDARDS AND MONITORING
• A new capital framework revises and strengthens the three pillars established by Basel II. The accord is also extended with several innovations, namely: • An additional layer of common equity• A countercyclical capital buffer• Proposals to require additional capital and liquidity to be held by banks whose
failure would threaten the entire banking system
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KEY FEATURES
• Capital requirements
• Leverage ratio
• Liquidity Requirements
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