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BASEL

Is a city in Switzerland

Is the headquarters of The Bank of International Settlements (BIS), themultinational financial institution for settlement among nations, formed in1930.

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The Basel Committee on Banking Supervision

(BCBS) was formed in 1974 by G 10 countries,under the auspices of BIS

following the failure of the Bankhaus Herstatt on

24.6.1974 which affected many countries, mostlythe G10 countries.

realising the need for healthy international

banking to catalyse the world trade

Secretariat housed in BIS.

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Over a period of time, the focus of the committeehas evolved, enlarging initiatives designed to

define roles of regulators in cross jurisdictionsituations

ensure that international banks do not escapecomprehensive supervision by a home regulatoryauthority

Promote a uniform capital requirements, so banksfrom different countries may compete with oneanother on level playing field

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The Basel committee does not havelegislative authority

Participant countries are implicitly boundto implement its recommendations withfeasibility to suit local economicconditions.

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In 1988, the Basel committee proposed - setof minimal capital requirements for banks

These became law in G10 countries in 1992the requirements have come to be known asthe 1988 Basel AccordBCBS has 13 member countries and its

Accord principles are subscribed to andimplemented by more than 100 countriesincluding India

RBIs association with BCBS dates back to1997 as India was among the 16 non-member countries that were consulted in thedrafting of Basel Core principles.

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The 1988 Basel Accord i.e. Basel Accord Iprimarily addressed banking with focus onCREDIT RISK

Banks were asked to provide capital atgreater than 8% on Risk Weighted Assetvalues

Not withstanding the internationalstipulation of 8%, RBI has stipulated theCapital Adequacy at 8% upto 31.3.99 andat 9% thereafter.

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As defined by Basel Committee a bankscapital comprises two tiers

Tier I - Core capital - comprising paidup equity capital + General Reserves

Tier II - Supplementary capitalcomprising specific reserves & preferredstocks and long term subordinated debt.Maximum - 50%

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In early 1990s, the committee updated the1988 accord to include Market Risk alsofor capital adequacy and was amendedaccordingly in 1996, capital requirementfor Market Risk was fixed at 2.5% basedon various parameters

However, neither the original accord nor

the amendment, took into congnizance the Operational Risk involved and thecapital requirement therefor.

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In 1999, the Basel Committee proposed aNew Capital Accord, known as Basel II.

The finalised Basel II Accord was releasedin June 2004 called InternationalConvergence of Capital Measurement andCapital Standards : a Revised Framework

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BASEL II Accord was founded in - ThreePillar approach to assess and managerisks.

Pillar I - Capital Requirements

Pillar II - Supervisory role

Pillar III - Disclosure norms and Marketdiscipline

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Pillar I

Minimum Capital requirement to supportthe risks in business, including operationalrisk.

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Pillar II - Supervisory Role / Review to

E nsure capital adequacy

E ncourage & use better risk management systems

Internal assessment of capital and setting capital targetscommensurate with risk profile

Management Responsibility for ensuring capitaladequacy beyond the core minimum

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Pillar III - Market Discipline

To have appropriate disclosure to marketparticipants on

- Capital structure - components, terms, Accounting policies etc.

- Risk exposure - quantitative & qualitative- Capital Adequacy ( CAR)

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Basel II Accord

- Retains the definition of capital &market risk provisions

- treats the credit risk differently

- recommends capital for OperationalRisk

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The scope of this program is

restricted to the discussion onOperational Risk Management

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summing up

Basel II Accord aims at regulatory measures to make the bankingsystem more safe and stable

It provides a finer approach towards Credit Risk Management /Rating mechanism as opposed to One size fits all approach of Basel I towards risk management.

Basel II deals with operational risk for the first time in additionto credit risk and market risk and has also suggested capitalcharge for OR

In order to be competitively effective both nationally andinternationally it has become almost mandatory for all of us to payserious attention on the issues of ORM and effectively manage /control this risk also in addition to credit risk and market risk

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At the unit (Branch) level, the OR assumes greater

significance in terms of

a) Branchs operations

b) Business continuity plan implementation

c) Attached capital tag on the ORM qualityd) Its impact on Banks performance / results in theemerging scenario.

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T hank you