S.

Particulars Basel Basel I Basel II Basel III

BIS and Basel Basel is a city in Switzerland. It is the headquarters of BIS (Banking for International settlement) estd at 17 May 1930.

Objectives of BIS With a common goal of financial stability and common standards on banking regulations (Domestic regulation by central bank of own country and
globally regulator by BIS) a. Common Standard. B. Procedure Development and Financial Stability
Background economics -Great depression -25% unemployment in US and 44% in German - Collapse of International trade- Rise of fascism in Europe- WWII start
problem in the 1930
Basel of History Basel committee on banking supervision form in 1974 after failure of Bratton woods system (BWS). To find out the reason for failure of BWS as an
assets. After failure of BWS Basel norms was created in 1988. This was prompted by the Herstatt accident, which triggered the cause for essential global
coordination in International settlement.

1 Norms BASEL ACCORD has given three BASEL NORMS which are BASEL 1, 2 and 3
Need for Basel Norms Bank faces high risk primarily because bank is one of the highly leveraged sectors. In view of this, banks are required to take certain strategic decisions to
ascertain whether the type and amount of risk assumed by them brings adequate compensation in terms of earnings in the short and long-runs and helps
them maximize the economic value in the long-term, while being in consonance with their risk appetite.

Basel Accords The set of agreement by the BCBS, which is mainly focused on risk to the bank and financial system are called Basel accords.

Purpose of Basel Accords The purpose of accord is to ensure FIS have enough capital on account to meet the obligation and absorb unexpected losses.

Committee on banking Basel Committee is a financial regulator bodies that formulates recommends guidelines for a common set of standards for banks supervision and risk
regulation and management. Initially G-10 country was the members. Now Including all G-20 country and beyond that are the members. G10 countries (currently 27
supervisory Practice members) (Belgium, Canada, France, German, Italy, Japan, The Netherlands, Sweden, The United Kingdom and the United states) established a
committee on banking regulation and supervisory practices. The committee formulates guidelines and provides recommendation on banking regulation
based on Capital/market and Operation risk.

Basel Committee- 1974 The Basel Committee - initially named the Committee of Banking Regulations and Supervisory Practices - was established by the central bank Governors
of the Group of ten countries at the end of 1974 in the aftermath (result) of serious disturbances in international currency and banking markets (notably
the failure of Bankhaus Herstatt in West Germany).

BW conference in July Lead by US, attended by delegates from 44 countries- Goal was to create a set of institutional to avoid a repeat of the 1930 Great depression -25%
1944 unemployment in US and 44% in German-Collapse of International trade-Rise of fascism in Europe-WWII start

WHO 730 delegates from 44 allied nations.

Where At the Mount Washington Hotel, Situated in Bretton woods, New Hampshire

Why To regulate the international monetary and financial order after the conclusion of world

When 1 July to 22 July 1944

What Institute was a. GATT b. Fixed Exchange Rate System c. IMF. D. Capital Control and IBRD or World Bank
created?
Basel I Original meant for Capital Requirement for lending/Replacement Risk.
Basel II Aims to determine how much capital that banks should have in place for the types of risks they face in their lending and investment activities
Capital Conservation Banks will be required to hold a capital conservation buffer of 2.5%. The aim of asking to build conservation buffer is to ensure that banks
Buffer maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress.
Countercyclical buffer The countercyclical buffer requirement will vary between zero and 2.5% of risk weighted assets. Nepal Rastra Bank will monitor credit growth and
other indicators that may signal a buildup of system-wide risk and make assessments of whether credit growth is excessive and is leading to the
buildup of system-wide risk. Based on this assessment Nepal Rastra Bank will put in place a countercyclical buffer requirement when circumstances
warrant. This requirement will be released when system-wide risk crystallizes or dissipates
Leverage Ratio Leverage Ratio intentionally does not distinguish between safer or riskier assets; meaning that for SLR a bank must hold the same minimum amount of
capital against low risk assets (e.g. US Treasuries) as higher risk assets. Highly Leverage banks have lower loss- absorption capacity and less resilient to
shocks. The non- risk base leverage ratio including all off balance item which will serve as backstop to risk base capital requirement
Liquidity Coverage Ratio To meet short term liquidity crisis bank has to maintain at least >100% of highly liquid assets that can be easily convert in cash. The liquidity coverage
ratio is an important part of the Basel Accords, as they define how much liquid assets have to be held by financial institutions. Because banks are
required to hold a certain level of highly liquid assets, they are less able to lend out short-term debt. The Liquidity coverage ratio is designed to
ensure that financial institutions have the necessary assets on hand to ride out short-term liquidity disruptions. This is to safeguard banks
against sustained financial stress for 30 days period

Net Stable Funding Ratio It is aimed at promoting resilience over longer term through incentives for banks to fund activities with more stable sources of funding. The ratio is
developed to address the maturity mismatch between liabilities and assets in the financial sector and to make sure that banks have sufficient stable
funding to withstand a yearlong liquidity crisis.
Herstatt risk or settlement Herstatt bank (Bankhaus I.D. Herstatt K.G.a.A.) of German went bankrupt on 26 June 1974 due to settlement risk in International finance). Foreign
risk exchange traded more than 3 times of capital. Also called Herstatt risk or settlement risk. It leads to creating of the BCBS. Responding to the cross-
jurisdictional implication of the Herstatt debacle (Calamity), the G-10 countries formed a standing committee under the auspices (Support) of the BIS
called BCBS.
Speculative currency The world was following speculative currencies policy and beggar thy neighbor policy also called merchandise policy was the policy focus of the entire
policies (Merchandise world to increase its exports by exporting as much as possible by working on the value of the currencies by devaluing the currencies artificially in order
policy) to increase the exports and limited imports. The main objective was to increase the exports and to collect or accumulate as much foreign currencies as
possible. And the same time, speculative currencies policies were going on because of freedom to value your currencies at you availed. So the country
was devalued your currencies and carrying out speculative currencies policy in order to benefit from devaluating of the currencies. It resulting World War
II because of there was varied by inequalities of variation in the currencies holding of currencies between different countries.
All currency pegged to In Bratton wood system all the currencies was pegged to US dollar and US dollor in return was pegged to gold. It resulting a most stable
USD, USD pegged to foreign currencies or international currency environment because all the currencies could not now devalued without devalued of US dollar.US
gold dollar could not devalued itself artificially because it was pegged to gold.

Speculative currency Before World War II, all the money was flowing into speculative currency movement rather than flowing into FDI. It resulting Bratton wood
movement stopped. system creation.
(Money into FDI)
Reason of Failure of The main reason of BWS failure was Marshall Plan. It was created by US. The focus/purpose was re-developed the European Union or the entire
BWS- Marshal Plan Europe. (At that time called Eastern and Western Europe) by providing its money for infrastructure development. Why US did it? Because US printed a
 lot of money in order to develop itself and when it printed a lot of money, they were face of inflation in the economy and they want to transfer this
inflation from itself to other countries in order to transfer inflation. It started to provide US dollar heavily to European Union and control the supply of
money to US. But it resulting artificial inflation in Europe.

Europe demanded In 1968 Europe demanded conversion of US dollar into gold. As per BWS US dollar could be converted into gold because US dollar was pegged to
conversion of USD into gold. So Europe demanded that US convert whatever US dollar Europe was holding into gold.
Gold

US announced collapse of But US could not do that because US had printed a lot of currencies which was not actually bagged by that much of gold. So US unilateral cancellation
the system & free float of of the international convertibility of US dollar to gold (This is called Nixon shocks) that announced the collapse of the system and free float trade of US
money. dollar. So it announces that it could free float based dollar and take it away from packing of gold. It resulting the collapse of Bretton wood system. In
1973 the BWS was replaced de facto by the current regime based on freely floating fiat currencies. As a result BCBS was created in 1978 in order to
resolve the crisis.

Failure of BWS In 1973, BWS lead to casualties in German and UK banking system with huge amount of foreign exchange exposure which are more than the capital of
the banks. The United States on August 15, 1971, unilaterally terminated convertibility of the dollar to gold. The action created the situation whereby the
US dollar became the sole backing of currencies and a reserve currency for the member states. In the face of increasing financial strain, the system
collapse in 1971.

Failure of Barings Bank How rogue trader Nick Leeson broke the bank. Baring Futures (Singapore) (BFS) was incorporated in Singapore on 17 September 1986. Leeson joined
the settlements department of Baring Securities (London), an investment arm of Baring Group, as a clerk in July 1989. He was transferred to Singapore
three years later.

Accounting and settlement for same person appoint Mr. Nick Leeson. Then he played in future market and options. He faced losses in those
transactions. Then he opened Error account 88888 and marked the losses as profit and report to head quarter. The losses was 1 billion 400 million. He
was then caught by the management. That was the reason of failure of bringing bank.

1.A Origin of Basel 1. Collapse of Bratton Wood 1. Substantial Losses in International Market 1. Collapse of Lehman brother and Bear
Concept/accord System since 1992 due to poor risk Management Sterns companies
2. Liquidation of Frankfurt bank practice 2. Goldman Sachs
3. Herstatt risk or settlement risk 2. US housing bubble and Sub Prime Crisis 3. Poor governance and risk Management
4. Failure of Barings Bank 3. Banking Crisis 4. Mispricing of credit
5. Free Float of Money 4. Economic downturn 5. Liquidity risk
6. Marshal Plan 5. European debt crisis 6. Excess Credit Growth
7. Nick son Shocks 6. 1997 Asian Financial Crisis 7. Global Financial crisis (GFC) 07-08
7. ad hoc bucket approach in Basel I 8. Sovereign Debt Crisis 2010-2013
9. Economics Crisis
1.B Failure of Basel 1. Limited differentiation of 1. Tendency towards Pro - cyclical Process
credit risk 2. An excessive use of external ratings
2. Static Measure of Default 3. An excessive prescription of the document
Risk 4. Complex Approach
3. No recognition of term- 5. Treatment Qualification
structure of credit risk: 6. No availability of high quality data
4. Simplified calculation of 7. The main problem of the banking system is to
potential future counterparty get and transform the data in such a way that
risk we are able to apply the relevant approach on
5. Lack of recognition of the data which is a big challenge for the
portfolio diversification effects supervisors of the banking system.
8. Lack of the explicit implementation of other
risks
9. Difficult quantification of operational risk
10.A high challenge for regulators
2 Introduction Saturday, May 1. 1988 1. First Consultative Paper-1999 Original 2010 Dec
17, 1930 2. Revised in 1996- Incorporate 2. Second Consultative Paper-2001
Market Risk Revised Version: 2011 June.
3. Third Consultative Paper-2003
4. Fourth Consultative Paper-2004 Describes the third version of the Basel
5. Final Doc-2004 Accords agreed upon by 27 countries on
6. Amendment 2005 September 12, 2010. Among the highlights
7. Final version 2006 was the increasing of Tier 1 capital from
2% to 4.5% and the addition of a buffer of
The greater risk to which the bank is exposed, 2.5%. The assets that qualify for capital
the greater the amount of capital the bank needs were also redefined.
to hold.

3 Implementation in Nepal 1999 2008 2013 to 2018 in Phased manner

Time Line

4 Main Tools of Risk 1. CAR 2. CAR 1. CAR

Management 3. Supervisory Review 2. Supervisory Review
4. Market Discipline 3. Market Discipline
4. Liquidity Coverage Ratio
5. Counter Cycle Buffer
6. Capital Conservation buffer
7. Leverage Ratio
5 Types of Risk 1. Credit Risk 1. Credit Risk 1. Credit Risk
2. Market Risk 2. Market Risk 2. Market Risk
3. Operation Risk 3. Operation Risk
4. Liquidity Risk
5. Counter Cycle Risk
6 Minimum CAR according CAR= 8% CAR= 8% CAR= 10.5% to 13%
to BCBS Tier 1= 4% Tier 1= 4%
Common Equity =4.50%

7 Minimum CAR according CAR=10% 1. CAR=10% CAR=11%

to NRB 2. Tier 1=4% Tier 1=6%
3. Common Equity Innovation tier 1=4% Common Equity=4.50%
8 Purpose Financial 1. Control to Credit Risk 1. To promote safety and soundness in FIS. 1. To minimize the probability of
Institutions have 2. Strengthen the stability of 2. To continue to enhance completive equality. recurrence of crisis to greater extend
enough capital banking system. 3. To constitute a more comprehensive approach 2. Improve banking sector ability to
on account to 3. Set up a fair a consistent to addressing Risk. absorb shocks arising from financial and
meet the international marketing system in 4. To render Capital Adequacy more risk economic stress.
Obligations and order to decrease competitive sensitive. 3. Improve risk Management and
absorb inequalities among international 5. To provide incentives for banks for enhance Governance.
unexpected banks. their risk measurement capabilities.
Losses.
9 Focus focuses on risks Credit Risk Credit Risk, Market Risk and Operation Risk Credit Risk, Market Risk, Operation Risk,
to banks and the Mitigation Risk, Default Risk, CCB and
financial system CYB.

10 Pillars One Pillar Three Pillar Three Pillar. 1. Enhance Minimum

Capital ad liquidity Requirement.2.
1. Constitutes of Capital/CAR 1. Minimum Capital Requirement/CAR Enhance Supervisor Review Process for
2. Risk Weighting Weight 2. Supervisor Review Process
firm wide risk management and capital
3. Market Discipline
Palling 3. Enhance Risk disclosure and
Market Discipline 4. CAR additional 5.
Liquidity rules

11 Supervisor Review Process 1. Power of National regulator over bank was This discusses the key principle of
increase supervisory review, supervisory
2. Bank would comply with requirement or transparency and accountability, risk
direction of regulators. management guidance produced by the
3. Regulator would get the power to supervise committee. Guidance relating to among
the bank functioning on regular basis other things the treatment of interest rate
risk, Credit Risk (Stress testing, definition
of default, residual risk and credit
 concentration risk), operational risk,
enhanced cross boarder communication
and cooperation and securitization

12 Disclosure of banks Disclosure of the bank capital and profile to the

regulators and public

13 Capital Requirements(% Basel II Basel II

of RWA)

1. Minimum common
equity Common 2.0% 4.5%
equity Tier 1

2. Capital ratio (6%) Additional Tier - 1.5%

1
3. Capital conservation
buffer (2.5%) 2.5%

Common equity + capital

conservation (all from 2.0% 7.0%
Common Equity)

1. Minimum Tier 1 capital 4.0% 6.0%

ratio
2. Minimum total capital 8.0% 8.5%
ratio
(Tier 1+Tier 2)

Total capital + capital 8.0% 11%

conservation

1. Leverage ratio (non-risk- - 4.0%

based)
2. Countercyclical capital - 0-2-5%
buffer (nat. discretion)
3. SIFI capital buffer
- Under Discussion
 Tier 1 Capital: Tier 1 Capital must be at least 6.0% of risk-weighted exposures at all times.

a. Common Equity Tier 1: Common Equity Tier 1 must be at least 4.5% of risk-weighted exposures at all times.
b. Additional Tier 1: 1.5 percent
Tier 2 Capital: Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 8.0% of risk-weighted exposure at all times

S.N Requirements Under Basel II Under Basel III Impact

i) Minimum Common Equity Tier 1 to Risk Weighted Exposure Ratio None 4.50% Bank will face a significant additional
capital requirement, and bulk of this
shortfall will need to be raised as
common equity or otherwise by
retaining dividends.
ii) Capital conservation buffer None 2.50%
iii) Minimum Common Equity Tier 1 Ratio plus Capital Conservation Buffer None 7%
[(i)+(ii)]- Basel II Tier 1 Capital
iv) Minimum Tier 1(Core Capital) to Risk Weighted Exposure Ratio( 6% 6%
Excluding conservation buffer)
v) Total Capital to Risk Weighted Exposure Ratio(Excluding conservation 10% 8.5%
buffer)
vi) Minimum Total Capital Ratio plus Capital Conservation Buffer None 11%

vii) Countercyclical buffer None 0-2.5%

viii) Leverage Ratio None 4%
ix) Liquidity coverage ratio None 100% Bank will face a significant additional
liquid Asset.
x) Net stable funding ratio None NRB shall Introduce minimum standard

xi) SIFI Measures None NRB shall issue the regulation.

Net Stable Funding Ratio
 Basel

Basel II Basel III Basel I

Element of Tier 1 Core Capital (Tier Suppllementray Total Capital Tier 1 Capital- Tier 2 Capital - Total Capital
Capital I) + Capital (Tier 2)+ =Fund Core Capital+ Suppllementary + Fund-8.5%

Common Equity
Equity Capital Ratio 6% Ratio 10%
Tier 1=4.5%

Non redeemable
Primary source of
- preference Disclosed reserve Additinal Tier 1=1.5%
funds
share

Share Premium Statutory reserve *** Ratio 6%

Proposed Bonus
Share

Statutory
Reserve

Retail Earning

Unaudited
Current year
profit

Capital
Redemption
reserve

Capital
Adjustment
reserve

Dividend
equalization fund

Other free rese

 FORM NO.2 RISK WEIGHTED EXPOSURE FOR CREDIT RISK

Basel A. Balance Sheet Exposures

Code Risk Weight
19 Claims on domestic banks that meet capital adequacy requirements 20%
26 Claims on Domestic Corporates 100%
31 Regulatory Retail Portfolio (Not Overdue) 75%
32 Claims fulfilling all criterion of regulatory retail except granularity 100%
33 Claims secured by residential properties 60%
34 Claims not fully secured by residential properties 150%
35 Claims secured by residential properties (Overdue) 100%
36 Claims secured by Commercial real estate 100%
37 Past due claims (except for claim secured by residential properties) 150%
38 High Risk claims 150%

Mitigation Code

Code Mitigation
ZA Deposits with Bank
ZB Deposits with other banks/FI
ZC Gold
ZD Govt.& NRB Securities
ZE G'tee of Govt. of Nepal
ZF Sec/G'tee of Other Sovereigns
ZG G'tee of domestic banks
ZH G'tee of MDBs
ZI Sec/G'tee of Foreign Banks
Basel Risk
Balance Sheet Exposure
Code Weight %
5 All Claims on Government of Nepal 0
17 Claims on Public Sector Entity (ECA 3-6) 100
19 Claims on domestic banks that meet capital adequacy requirements 20
Claims on Domestic Corporates
26 The risk weight for claims on domestic corporate, including claims on insurance companies and 100
securities firm will be 100%. The domestic corporate includes all firms and companies
incorporated in Nepal as per prevailing Acts and regulations. (Loan more than 10 Million)
Regulatory Retail Portfolio (Not Overdue)- Criteria
Orientation criteria
Exposure is to an individual person or persons or to a small Business. Bank should obtain written
declaration from the borrower to the effect that their indebtedness is within the threshold across
all banks and FIs. (Upto 10 Million)
Product criteria
1. Revolving credits and lines of credit, (including overdraft, hypothecation etc.)
2. Term.loans and leases (e.g. hire purchase, auto loans and leases, student and educational loans
31 and,
3.Small business facilities commitments 75
4.Deprived sector loans up to a threshold of Rs.10 million (Ten Million only)
Granularity criteria
NRB must be satisfied that the regulatory retail portfolio is sufficiently diversified to a degree that
reduces the risks in the portfolio, warranting the 75% risk weight. No aggregate exposure to one
counterpart can
Exceed 0.5 % of the overall regulatory retail portfolio.
Low value individual criteria
The total aggregated exposure to one counterpart cannot exceed an absolute threshold of Rs.10
million (Nepalese Rupees Ten Million only)
 Claims secured by residential properties
1. Lending to individuals meant for acquiring or developing residential property which are fully
secured by mortgages on residential property, that is or will be occupied by the borrower or that is
rented, will be risk

33 -weighted at 60%. However, banks should ensure the existence of adequate margin of security 60
over the amount of loan based on strict
Valuation rules.
Banks have to develop product paper and get it approved from the board of directors to regulate
this kind of lending. The claims in order to be eligible for this category have to be in strict
compliance with this product paper
Claims not fully secured by residential properties
34 150
Where the loan is not fully secured, such claims have to risk weighed at 150%
Claims secured by residential properties (Overdue)
1 .When claims secured by residential properties are or have been past due at any point of time
35 100
during the last two years, they shall be risk
-weighted at 100%,net of specific provision
Claims secured by Commercial real estate
1. Claims secured by mortgages on commercial real estate, except past due, shall be risk-weighted
36 at 100%. Commercial real estate hereby refers to mortgage of Office buildings, retail space, multi- 100
purpose commercial premises, multi-family residential buildings, multi-tenanted commercial
premises, industrial or warehouse space, hotels, land acquisition, development and construction
etc.
Past due claims (except for claim secured by residential properties)
Any loan, except for claim secured by residential property, which is or has been past due at any
37 150
point of time during the last two years, will be risk-weighted at 150% net of
Specific provision.
 High Risk claims
1. 150% risk weight shall be applied for venture capital and private equity investments.
2. Exposures on Personal loan in excess of the threshold of regulatory retail portfolio and lending
against securities (bonds and shares) shall attract a risk weight of 150%. Similarly, exposures on
credit card shall also warrant a risk weight of 150%.
3.Investments in the equity and other capital instruments of institutions, which are not listed in the
stock exchange and have not been deducted from Tier 1 capital, shall be risk
38 Weighed at 150% net of provisions. 150
4. Investments in the equity and other capital instruments of institutions, which are listed in the
stock exchange and have not been deducted from Tier 1 capital, shall be risk weighed at 100% net
of provisions. Investments in mutual fund shall also be risk weighted at 100%.
5. The claims which are not fully secured or are only backed up by personal guarantee shall attract
150% risk weight.
6. Where loan or qualifying residential mortgage loan or under other categories, it shall be risk
weighed at 150%.