BASEL ACCORD

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basel accord

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BASEL ACCORD :

BY:ASHISH GUPTA MBA FM ROLL NO:08 BASEL ACCORD

MAJOR BASEL OBJECTIVES :

MAJOR BASEL OBJECTIVES Better align regulatory capital to underlying risk and provide incentives for banks to enhance their risk management capabilities Capital adequacy more than compliance with required minimum ratios –also encompasses supervisory review and market discipline Meaningful minimum prudential requirements and international consistency

BASEL COMMITTEE EFFORT:

BASEL COMMITTEE EFFORT release of first consultative paper (June 1999) - significant work has continued - more than 200 comments received from a variety of sources ( financial institutions ,supervisors, etc.) Internal ratings-based (IRB) approach to capital adequacy has taken on greater role in the committee`s thinking Strong support for three pillar framework and increased risk differentiation

HISTORY OF BASEL:

HISTORY OF BASEL The Basel Committee is named after the city of Basel, Switzerland. In early publications, the Committee sometimes used the British spelling "Basle" or the French spelling " Bâle “ Formerly, the Basel Committee consisted of representatives from central banks and regulatory authorities of the Group of Ten countries plus Luxembourg and Spain In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accord.

FORMS OF BASEL :

FORMS OF BASEL BASEL –I(1988) BASEL –II(2004) BASEL-III(2010)

BASEL-I:

BASEL-I The first Basel Accord (Basel - I) was completed in 1988 The reason was t o create a level playing field for “ internationally active banks ” Banks from different countries competing for the same loans would have to set aside roughly the same amount of capital on the loans

OBJECTIVE OF BASEL-I:

OBJECTIVE OF BASEL-I 1)The purpose was to prevent international banks from building business volume without adequate capital backing 2) The focus was on credit risk 3) Set minimum capital standards for banks 4) Became effective at the end of 1992

PowerPoint Presentation:

BASEL-I C APITAL REQ UI REMENTS Capital was set at 8% and was adjusted by a loan’s credit risk weight Credit risk was divided into 5 categories: 0%, 10%, 20%, 50%, and 100% Commercial loans, for example, were assigned to the 100% risk weight category

PowerPoint Presentation:

B ASEL- II B asel - II consists of three pillars : Minimum capital requirements for credit risk, market risk and operational risk—expanding the 1988 Accord (Pillar I) Supervisory review of an institution’s capital adequacy and internal assessment process (Pillar II) Effective use of market discipline as a lever to strengthen disclosure and encourage safe and sound banking practices (Pillar III)

THREE PILLARS:

THREE PILLARS

PowerPoint Presentation:

BASEL-II PILLAR I: Minimum Capital Requirement Capital Measurement: New Methods Market Risk: In Line with 1993 & 1996 Operational Risk: Working on new methods

PowerPoint Presentation:

Pillar I is trying to achieve If the bank’s own internal calculations show that they have extremely risky, loss-prone loans that generate high internal capital charges, their formal risk-based capital charges should also be high Likewise, lower risk loans should carry lower risk-based capital charges BASEL-II

PowerPoint Presentation:

PILLAR 2 : Supervisory Review Process Banks are advised to develop an internal capital assessment process and set targets for capital to commensurate with the bank’s risk profile Supervisory authority is responsible for evaluating how well banks are assessing their capital adequacy BASEL-II

PowerPoint Presentation:

BASEL-II PILLAR 3 : Market Discipline Aims to reinforce market discipline through enhanced disclosure by banks. It is an indirect approach, that assumes sufficient competition within the banking sector.

BASEL-III:

BASEL-II I Basel-III is the global regulatory standard on bank capital adequency ,stress testing and liquidity risk . Basel-III retains core solvency ratio at 8% of RWAs Basel-III requires banks to hold 4.5% common equity (2% in basel -III) Basel-III introduces additional capital buffers, impemented by 2019: mandatory capital conservation buffer of 2.5% of RWAs discretionary countercyclical buffer of 2.5% of RWAs

BASEL-III:

BASEL-II I FOCUS AREAS OF BASEL-III transparency and quality of capital base Tier 1 capital: common shares and retained earnings tier 2 capital: capital instruments tier 3 capital: eliminated risk coverage of capital integrated management of market and counterparty credit risk credit value adjustment risk incorporated in credit management

REASONS FOR FORMULATION OF BASEL-III:

REASONS FOR FORMULATION OF BASEL-III Reducing profitability of small banks and threat of takeover Lack of comprehensive approach to address risks Self regulation in area of asset securitization Lack of safety Inability to strengthen the stability of financial system Failure to achieve large capital reductions Failure in enhancing the competitive equality amongst banks

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