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Banking Term: BASEL Norms

Sep 30, 2015 12:37 IST

    The Basel Committee on Banking Supervision has its origins in the financial market turmoil that followed the breakdown of the Bretton Woods system of exchange rates in 1973. After the collapse of Bretton Woods, many banks incurred large foreign currency losses. In response to disruptions in the international financial markets at that time, the central bank governors of the G10 countries---Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States established a Committee on Banking Regulations and Supervisory Practices at the end of 1974. Later renamed the Basel Committee on Banking Supervision, the Committee was designed as a forum for regular cooperation between its member countries on banking supervisory matters and improving the "quality of banking supervision worldwide."  The committee also serves as a bank for central banks.

    After existence as a G10 body, the Committee expanded its membership in 2009 and again in 2014 and now includes 28 jurisdictions. Generally, Countries are represented on the Committee by their central bank. The present Chairman of the Committee is Stefan Ingves, Governor of Sveriges Riksbank, Sweden's central bank. He was appointed as Basel Committee chairman in July 2011 and has been reappointed until June 2017. The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland.

    Basel Accords:

    • The committee issued its first major document in 1975.  In the 1980s, the committee's work increasingly focused on issues of bank capital adequacy, which led, in 1988, to the Basel Accord on capital requirements, or Basel I. The accord called for banks to maintain two minimum capital ratios:

     A bank's "tier one" core capital, which had to be at least 4 percent of risk-weighted assets, and a bank's "tier two" total capital, which had to be at least 8 percent of risk-weighted assets.

    • In 1998, the committee began to revise the Basel Accord to address banking risks beyond credit risk, paving the way for the issuance of a revised Basel framework--Basel II--in June 2004. Basel II divided bank regulation into three pillars: minimum capital requirements that expanded those outlined in the 1988 accord; regulatory supervision and risk management; and harnessing market forces through effective disclosure to encourage sound banking practices.

    However, when the global financial crisis erupted in 2008, Basel II proved in many ways to be insufficient.

    Towards Basel III:

    The financial crisis of 2008 prompted the Basel Committee to once again revise its accord on capital requirements, which culminated in 2010 with the development of the Basel III accord on capital and liquidity standards. The revised accord "establishes tougher capital standards through more restrictive capital definitions, higher risk-weighted assets, additional capital buffers, and higher requirements for minimum capital ratios. However, the Committee's decisions have no legal force. Rather, it formulates supervisory standards and recommends sound practices in the expectation that individual national authorities will implement them.

    Indian banks adopt Basel-III norms in a phased manner

    The Indian Basel III framework for bank risk-based capital requirements came into force in April 2013. It observed that several aspects of the Indian framework were more conservative than the Basel framework. The BIS has complimented the Indian banking system for their substantial reforms and alignment with the Basel framework.

    As per report released by RBI, ‘Indian banks are already adopting Basel-III norms in a phased manner and are steadily progressing towards this global standard. The norms will completely come into effect from March 31, 2019. As per RBI statement announced in June 2015, public sector banks would need an additional capital of Rs 2.40 lakh crore by 2018 to meet the Basel III capital adequacy norms.

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