BASEL Norms

Question 1

Bank for International Settlements (BIS)

Answer 1

An organisation based in Basel, Switzerland.

Aim: to foster cooperation at global level to achieve financial stability and common standard of banking.

Question 2

Basel Committee on banking supervision

Answer 2

Committee comprising of central banks of various member countries. The set of agreements by committee= Basel Norms

Question 3

Basel Capital Accord (Basel I) 1988

Answer 3

1. Focused entirely on credit risk
2. It defined capital and risk weight for banks
3. 8% of RWA-risk weighted assets
   RWA= Calculation of total assets by taking into account rick associated with them

India adopted Basel-1 in 1999.

Question 4

Basel-II Guidelines 2004

Answer 4

More refined. Guidelines were based on 3 parameters

Pillar 1: CAR

a. Capital adequacy requirement
b. Minimum CAR= 8% of RWA
c. Three types of risks are included.

Pillar 2: Supervisory review

a. Central bank is to develop and use better risk management system to manage and monitor three types of risks:
i) Credit: Borrower might default
ii) Market: Risky investment due to vagaries of market.
iii) Operational

Pillar 3: Market Discipline Increased disclosure requirements to central banks.

Basel III- 9% of RWA

Question 5

Recapitalization

Answer 5

Lending to the bank the resources needed to conform to capital adequacy norms which stand at 9% today

Question 6

Problem with Basel Norms

Answer 6

1. All sovereign debt is given risk weightage equal to zero.
2. All corporate debt is given equal risk weightage irrespective of corporate involved

This led to problem of banks giving more loans to govt.