14a wow vipul's Chapter 12 Disclosure Requirement under Basel ee, =— 12.1 Basel Norms i Son 122 Basel Committee on Banking Super pial 123 Three Sets of Regulations Basel-l, Il, and 12.4 Exercises 12.1 BASEL NORMS: Introduction: (1) International Banking Regulations: Basel norms or Ba: accords are the international banking regulations issued by the Basel Committee on Banking Supervision. (2) Effort to Coordinate Banking Regulations: The Basel no’ are an effort to coordinate banking regulations across tl globe, with the goal of strengthening the internatio banking system. \ ae Fig. 12.1; Basel Normsasel norm egulations isu sion. ons: It fir Requirement under Base oust Jer Basel wor oe 0 en It is the set of the agreement by the = ee of Banking Supe i RUORR Dunks anid the fing Ct ee which focuses on the financial system. 2.2 BASEL COMMITTEE ON BANKING SUPERVISION: w ae The Basel Committee on Banking Supervision (BCBS) (a) Primary global standard setter for the prudential regulation of banks, and (b) Provides a forum for regular cooperation on banking supervisory matters for the central banks of different countries. Established in 1974: It was established by the Central Bank governors of the Group of Ten countries in 1974. Expanded: The committee expanded its membership in 2009 and then again in 2014. The BCBS now has 45 members from 28 Jurisdictions, consisting of Central Banks and authorities with responsibility of banking regulation. (4) Forum: It provides a forum for regular cooperation on banking supervisory matters. Objective: Its objective is: (a) To enhance understanding of key supervisory issues, and (b)Improve the quality of banking supervision worldwide. Q GI 6 Fig, 12.2: Basel Committee on Banking Supervision The 3 Main Pillars or 3 Main Principles of Basel III: The 3 main pillars or 3 main principles of Basel II are given below: () Minimum Capital Requirements. (2) Leverage Ratio.of Banking Sector (MC 1 accounting: 146 ror vigul’¢ (a) Liquidity Requirements . Sian Piers ot | [ 2™ mat) I @ i @ } : 4 teey | inirwury Capital | Towcage Ratio ninuemert ‘Requirements asel IL The 3 Main Pillars of B ks lend to different type Fig. 12. Need of Basel norms: (1) Different Types of Borrowers: Banks | of borrowers and each carries its own risk. i he public as wi (2) Equi bt: They lend the deposits of tl 0 Se ce et i.e., equity and debt. as money raised from the mark i (3) Variety of Risks: This exposes the bank toa variety of risks 9 default and as a result they fall at Risk of Non-Recovery: Therefore, certain percentage of capital as security a} times. Banks have to keep aside 4 gainst the risk 9 non-recovery- (5) Norms to tackle risks: The Basel committee has produced norms called Basel Norms for Banking to tackle this risk. 12.3 THREE SETS OF REGULATIONS-BASEL-I, II, AND Ts The Basel Committee has issued three sets of regulations whic are known as Basel-I, II, and III. BASEL-I: (1) It was introduced in 1988. (2) It focused almost entirely on credit risk. (3) pent risk fee possibility of a loss resulting from orrower's failure to repay a loan ! obligations. Traditionally, i Bee. cont 1 ly, it refers to the ri # ma pot cecslv a ie raed principal and asin se lefined capital and structu: i ro h re of risk weights oN minimum capital requirement wa: f eo ighted assets (RWA), S fixed at 8% of (6) RWA means assets with different tisk profiles.et vu" 147 (@ For example, an asset backed by collateral would carry lesser q risks a8 compared to personal loans, which have no collateral k @ India adopted Basel-1 guidelines in 1999 By, S paseL-H: \ @)_ In 2004, Base! II guidelines were published by BCBS. @ These were the refined and reformed versions of Basel I k accord Ny (3) The guidelines were based on three parameters, which the committee calls it as pillars. Capital Adequacy Requirements: Banks should maintain a it minimum capital adequacy requirement of 8% of risk assets. nks (5) Supervisory Review: According to this, banks were needed to develop and use better risk management techniques im bs monitoring. and managing all the three types of risks that a = eto} bank faces, viz. credit, market and operational risks. CUrity ap | @) Market Discipline: This needs increased disclosure ; requirements. Banks need to mandatorily disclose their CAR, git risk exposure, etc. to the central bank. ! (7) Basel II norms in India and overseas are yet to be fully ng tot implemented though India follows these norms. BASEL III: (1) In 2010, Basel III guidelines were released. (2) These guidelines were introduced in response to the financial crisis of 2008. | @) Aneed was felt to further strengthen the system as banks in the developed economies were under-capitalized, over- leveraged and had a greater reliance on short-term funding, It was also felt that the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk. (5) The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity. Capital: The capital adequacy ratio is to be maintained at 12.9%. The minimum Tier 1 capital ratio and the minimum Tier 2 capital ratio have to be maintained at 10.5% and 2% of tisk-weighted assets respectively. a ONS-BASEL/ » sets oF 4 6 ? a stelle 8ing oF Banking sector (MC ountit «tal conservation ina capital 5 have to maintal Sa ciseito a fe addition, bare intercyclical puffer buffer of "0. ained at 0-2.5%- . ained the leverage rate bas he he ratio of a bank's vipul's™ AC 148 rare e at least 3 %. The maint 2 @ Leverage: 1 capital to average leverage rate is € ‘co liquidity ratios; total consolidated assets qe Ww 3) Funding ond Liquidity: Basel-lIT create of: LCR and NSFR: CR) will require banks to | * The liquidity coverage ratio ue 2 assets sufficient to i wi hold a buffer of high-quality quid tered in an. acute °° deal with the cash outflows ee B aersinotn E short term stress scenario aS epecie fap The goal if Eh + This is to prevent situations like “Ban! ae ee to ensure that banks have enough liquidity @ : stress scenario if it were to happen p f * The Net Stable Funds Rate (NSFR) requires banks to 4 maintain a stable funding profile in relation to their off- ; balance-sheet assets and activities. NSER requires banks 1 ' ources of finance 6 to fund their activities with stable s (reliable over the one-year horizon). + The minimum NSFR requirement is 100%. Therefore, LCR measures short-term (30 days) resilience, and NSFR measures medium-term (1 year) resilience. The deadline for the implementation of Basel-III was March 2019 in India. It was postponed to March 2020. In light of the coronavirus pandemic, the RBI decided to defer the implementation of Basel norms by further 6 months. 7 . prtentne: cits me under Basel If means lower capital : the panks in terms of provisioning requirements, including the NPAs. * — This extensio1 i 5 Banks and se ara tdbe Bese of Indian Bae eck Sn the eyes of the global players. It occurs when a lar; : ee ‘ge numbe: eae Caren withdraw pp et nd ns e bank's solvency. As more People i, ay a100% lience, oe. of B ps ds, the probability of def orple fb withdraw their pesomdla increases, prompting, more co a @ @) @ 6) (6) Tier 1 Capital vs. Tier 2 Capital: Banks have two main silos o unter Cyclical Capital Buffer (CCCB): ure Requirement under Basel a 149 following Basel-IIl_ norms, fi i Bey recre rsas oacooney, The CCCB is a part of such norms and is calculated as a fixed percentage of a bank’s risk-weighted loan book. The key respect in which the CCCB differs from other of capital adequacy is that it works to help a bank counteract the effect of a downturn or distressed economic conditions. With the CCCB, banks are required to set aside a higher portion of their capital during good times when loans are growing rapidly, so that the capital can be released and used during bad times, when there’s distress in the economy- Although the RBI had proposed the CCCB for Indian banks in 2015 as part of its Basel-III requirements, it hasn‘t actually required the CCCB to be maintained, keeping the ratio at zero percent ever since. This is based on the RBI's review of the credit-GDP gap, the growth in GNPA, the industry outlook assessment index, interest coverage ratio and other indicators, as part of the first monetary policy of every financial year. forms f capital that are qualitatively different from one another: Tier 1: a) () (2) Tier 2: () It refers to a ba It refers to a bank's core capital, equity, and the disclosed reserves that appear on the bank's financial statements. In the event that a bank experiences significant losses, Tier 1 capital provides a cushion that allows it to weather stress and of operations. maintain a continuity nk’s supplementary capital, such as and unsecured subordinated debt undisclosed reserve have an original maturity of at least instruments that must five years.vm accounting f BanHine SACtO (MC vipst’s e than Tier 1 capital oer dered less reliabli hifi Mreately calculate and morg yifficult 150 is cor to ace ore ¢ (2) Tier 2 capital F because it is ™ difficult to liquid in India: i : on implementing Base! dine for . ack t March 2020. ‘ed back to the RBI decided to ynavirus P' 01 andards for another Jementation |-III was March Implementatit (a) In India, the deas 2019. It was push (2) Due to the cor postpone the imp) er Basel II] results in a lower 6 months. Extending the time period und ‘ capital burden on banks of provisioning requirements, including NPAs. This extension would have af and central bank is perceived by Effect of Basel III on Banks: The cost of increasing capital ratio: lending rates, resulting in a decreas€ in lending. e economy because it ‘This will have a significant impact on th will result in lower investment, exports, and consumption. Conclusion: en RBI has implemented these guidelines in the country in ae 2 bring bank regulation and compliance processes in line ose of other global banks, ensuring that Indian banks are ii a strong position to absorb any financial risk. af in terms impact on how Indian banks global players. 5 may cause banks to raise 12.4 EXERCISES: () byes: Choice Questions (MCQs): ) it occa eee | a rs when a large number irri wir cps era ha nko chad (@ Bank Run (ii , fer concems of the Te be peuatlon (i) Bank Rules (iv) Bank Rout i ie Ener ee moet Basel resus in a lower ca (il) Reducit irements, includi pital burden on Cal Reducing i) Target ing NPAS. itive on ing (Iv) All of the above Itrefers to a bank's (078010) Te ye goon — hea