A Glance At Basel Norms

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Hello Readers, today we are going to share everything about Basel Norms 1,2 & 3 in simple and easy language. These Norms are very important for banks and it is necessary for banking aspirants that they should know about these norms.

A Glance At Basel Norms

Background:- Basel is a place in Switzerland where a conference of central bank representatives held to discuss how to manage the risk in banking. Basel Norms are basically international guidelines for risk management and to set minimum capital requirements for banks.

  • Basel Norms are formed by Bank for International Settlement(BIS) and the committee formed for Basel norms called The Basel Committee on Banking Supervision (BCBS) in 1988.
  • Application of these norms totally depend on central bank of individual country. For example in India it is totally depend on RBI to whether to apply Basel norms or not. RBI has also right to make amendments in these rules before application.
  • These norms are called Basel norms. They are
    1. Basel 1
    2. Basel 2
    3. Basel 3

    Basel 1 :- India adopted Basel 1 guidelines in 1999. Basel 1 normsfocused on credit risk and appropriate risk-weighting of assets. Banks are required to hold capital equal to 8% of their risk-weighted assets (RWA) known as Capital Adequacy Ratio, which is totally depend on the amount of risk. For example; if loan given to Government by any bank than the capital adequacy ratio will be nil because banks money in safe hands and there is very less risk. On the other hand if loan given to any individual where risk is 100% than capital adequacy will be 100 *8%= 8.

    Basel 2 :- In June 1999, the Committee issued a proposal for a new capital adequacy framework to replace Basel 1. The revised framework comprised three pillars, namely minimum capital, supervisor review and market discipline.

    a.) Pillar 1:- Minimum Capital Requirement :- Pillar 1 is same as Basel 1 norms to hold 8% as capital adequacy. It includes three major components of risk ; Credit Risk, Operational Risk and Market Risk.

    b.) Pillar 2:- Supervision :- It includes 1. Internal Supervision ( by bank itself)
    2. External Supervision (by RBI in India)

    c.) Pillar 3:- Market Discipline:- As per this disclosure banks will have to disclose all the related information to bank.

    Basel 3 :- The guidelines of Basel 3 would become effective from 2013. Capital requirement under Basel 3 divided in two tires ; tire 1 represent minimum capital requirement & tire 2 equals to CAD ratio minus tire 1 capital requirement ratio. Banks also kept some extra money in securities, cash called conservation buffer. For example; if CAD = 8% [tire 1= 6% (minimum), tire 2 = 2% (8-6)] suppose conservative buffer 2.5% than total capital requirement 10.5% (8+2.5).

    Basel Norms in India

  • RBI made Capital Adequacy Ratio 9% compulsory from march 2009. CAD includes tire 1= 7%, tire 2 = 2% and conservative buffer =2.5% ,total capital requirement = 11.5%
  • At present bank follows Basel 2 norms.
  • The Reserve Bank of India has extended the timeline for full implementation of the Basel III capital regulations by a year to march 31,2019 fromMarch 31, 2018.
  • As per finance Minister total 2,40,000 croremoney needed by Public Sector Banks for implementation of Basel 3 norms.
  • Money given by government till now;
    In 2013-14 14000 crore
    In 2014-15 11,200 crore
    In 2015-16 7940 crore.

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