Banking Drive: All You Need to Know About BASEL III NormsDEVENDRA VISHWAKARMA
In order to boost your score in General Awareness section and also to help you with interview preparation for the upcoming Exams we are here with a new initiative Banking Drive. Here we are posting an article on BASEL-III norms. I hope this will help you.
All You Need to Know About BASEL III Norms
The Basel committee on Banking Supervision (BCBS) was formed in 1974 by a group of central bank governors of G-10 countries. Later on the committee was expanded to include members from nearly 30 countries. BCBS in 1988 released Basel-I accords and subsequently to overcome the loopholes in it Basel –II was released in 2004.
BCBS released a comprehensive reform package in Dec 2010, which is called as Basel –III, a global regulatory framework for more resilient banks and banking systems. These recommendations cover almost all the nations. And it amend the Basel -2 guidelines, also introduces some new concepts and recommendations.
The question now arises when we already have defined norms in place then what is the need for new norm? Let’s discuss it in detail.
Need For BASEL-3 Worldwide:
Banks mainly deals with three kind of risks. These are
1. Credit risk
2. Market risk
3. Operational risk
What is Credit risk?
It is basically the risk of loss, arising when a borrower is not capable of paying back the loan as promised. Such borrowers are also known as Sub-prime borrowers.
Now lets go back to the year 2008 ,when all of us observed /witnessed the Global financial crisis ,which originated in US because of these Subprime borrowers and this crisis thereafter spilled over in the other markets as well. It created financial crisis throughout the world.
Thus a need was felt for more stringent banking regulation worldwide.
Now In India what is the need to adopt such norms when we saw our banking system standing firm even during the crisis.
Need for Basel –III in INDIA
1. Firstly ,The most important reason is that as India connects with the rest of the world, and as increasingly Indian banks go abroad and foreign banks come on to our shores, we cannot afford to have a regulatory deviation from global standards. Any deviation will hurt us.
2. Secondly, if we ought to maintain a low standard regulatory regime this will put Indian banks at a disadvantage in global competition.
Therefore ,It is becomes important that Indian banks have the cushion provided by this risk management system to withstand shocks from external systems, especially as we deepen our links with the global financial system.
In India, Basel III regulations has been implemented from April 1, 2013 in phases
and it will be fully implemented as on March 31, 2019.
The pillars of BASEL norms:
1. Capital adequacy requirements
2. Supervisory review
3. Market discipline
Recommendations of Basel –III
Firstly,Basel -3 recommended that the Capital Adequacy ratio(CAR) be increased to 8% internationally, while in INDIA it is 9%.
Capital Adequacy ratio(CAR), also known as
Capital to Risk (weighted ) Assets Ratio (CRAR),
is a ratio of a bank’s capital to its risk.
Capital is the money a bank receives in exchange for issuing shares.This capital is further classified into two – Tier 1 and Tier 2 capital.
Out of the 9% (of RWA) capital adequacy requirement ,7%(of RWA) has to be met by Tier 1 capital while the remaining 2%(of RWA) by Tier 2 capital.
Risk weighted assets– Every bank assigns its assets some weight-age based on the risk involved.Thus apply a weight percentage to each of its assets.
For example –