BASEL COMMITTEE &

BASEL NORMS

PRESENTED BY-
Yasha Singh
4113007007
 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.
 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.
 The Committee seeks to achieve its aims –
 By setting minimum supervisory standards.
 By improving the effectiveness of techniques for supervising international
banking business.
 By exchanging information on national supervisory arrangements. And, to
engage with the challenges presented by diversified financial
conglomerates.
 The Committee also works with other standard-setting bodies,
including those of the securities and insurance industries.
 The Committee's decisions have no legal force.
 Rather, the Committee formulates supervisory standards and guidelines
and recommends statements of best practice in the expectation that
individual national authorities will implement them.
 In this way, the Committee encourages convergence towards
common standards and monitors their implementation, but
without attempting detailed harmonisation of member
countries' supervisory approaches.

 One important aim of the Committee's work was to close gaps

in international supervisory coverage so that-
 No foreign banking establishment would escape supervision.
 That supervision would be adequate and consistent across member
jurisdictions.
 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.
 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.

 Ultimately, this framework was introduced not only in member

countries but also in virtually all other countries with active
international banks.
 CAPITAL ADEQUACY RATIO (CAR)

 Expressed as a percentage of a bank's risk weighted credit

exposures.

 Also known as "Capital to Risk Weighted Assets Ratio (CRAR).

 CAR = Capital / Risk >= 8%

 Ratio is used to protect depositors and promote the stability

and efficiency of financial systems around the world.
 TOTAL CAPITAL
( AT LEAST 8% OF TOTAL RISK-WEIGHTED ASSETS)

TIER 1 CAPITAL
THE BOOK VALUE OF AT LEAST 4%
ITS STOCK + OF TOTAL RISK-
RETAINED WEIGHTED
EARNINGS ASSETS

TIER 2 CAPITAL

LOAN-LOSS RESERVES + SUBORDINATED DEBT.

 PURPOSE OF BASEL 1

 Strengthen the stability of international banking system.

 Set up a fair and a consistent international banking system in

order to decrease competitive inequality among international
banks.
 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.
 THE BASEL II FRAMEWORK

• Credit Risk
PILLAR 1:
MINIMUM • Market Risk
CAPITAL
REQUIREMENTS • Operational Risk

• A guiding principle for

banking supervision
PILLAR 2: PILLAR 3: Disclosure
SUPERVISORY MARKET requirements
REVIEW DISCIPLINE
 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.
 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.
 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.
 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 - the capital conservation buffer -
that, when breached, restricts payouts of earnings to help protect the
minimum common equity requirement;
 A countercyclical capital buffer, which places restrictions on
participation by banks in system-wide credit booms with the aim of
reducing their losses in credit busts;
 Proposals to require additional capital and liquidity to be held by banks
whose failure would threaten the entire banking system;
 a leverage ratio - a minimum amount of loss-absorbing capital relative to
all of a bank's assets and off-balance-sheet exposures regardless of risk
weighting;

 liquidity requirements - a minimum liquidity ratio, intended to provide

enough cash to cover funding needs over a 30-day period of stress; and
a longer-term ratio intended to address maturity mismatches over the
entire balance sheet; and

 additional proposals for systemically important banks, including

requirements for augmented contingent capital and strengthened
arrangements for cross-border supervision and resolution.
 SUGGESTED REQUIREMENTS

 The minimum common equity and Tier 1 requirements

increased from 2% and 4% levels to 3.5% and 4.5%,
respectively, at the beginning of 2013.
 The minimum common equity and Tier 1 requirements will be
4% and 5.5%, respectively, starting in 2014.
 The final requirements for common equity and Tier 1 capital
will be 4.5% and 6%, respectively, beginning in 2015.
 The 2.5% capital conservation buffer, which will comprise
common equity and is in addition to the 4.5% minimum
requirement, will be phased in progressively starting on 1
January 2016, and will become fully effective by 1 January
2019.
 The liquidity coverage ratio (LCR) will be phased in from 1
January 2015 .
 It will require banks to hold a buffer of high-quality liquid assets
sufficient to deal with the cash outflows encountered in an
acute short-term stress scenario as specified by supervisors.
 To ensure that banks can implement the LCR without disruption
to their financing activities, the minimum LCR requirement will
begin at 60% in 2015, rising in equal annual steps of 10
percentage points to reach 100% on 1 January 2019.
 The other minimum liquidity standard introduced by Basel III is
the net stable funding ratio. This requirement, which will be
introduced as a minimum standard by 1 January 2018, will
address funding mismatches and provide incentives for banks
to use stable sources to fund their activities.