Basel 1& 2

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I & II:

I & II Presented By DHEERAJ

Overview of BASEL:

Overview of BASEL Committee founded in 1974 . By Central Bank Governors. Focus – Banking Supervision. Objective - Adequate supervision. Meet 4 Times in a year. Around 30 working groups /Task Force. Location at Secretariat : Basel, Switzerland.

4 Sub-committees :

4 Sub-committees Standard Implementation Group Policy Development Group Accounting Task Force Basel Committee Group

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What is Tier 1 Capital ? Core capital Includes (Equity, Perpetual Non-Convertible Preference Shares, Disclosed Reserves) Maximum 15% usage Tier 1 Capital Ratio = Equity capital/RWA What is Tier 2 Capital? Supplementary Capital Includes (Undisclosed Reserves, Revaluation Reserves, Hybrid instruments, unsecured debt.) 100% Usage

Basel Accord 1:

Basel Accord 1 Introduced in 1988 . Objectives of Basel Accord 1 are as follows: To ensure an adequate level of capital in the international banking system. To strengthen the competitive markets, under which banks could no longer build in adequate business volumes without adequate capital backing. According to Basel 1, banks are required to hold capital equal to 8% of the risk-weighted assets.

Basel Accord 1:

Basel Accord 1 Capital = 8% of Risk – Weighted Asset Tier 1: Shareholders Equity and Reserves and Surplus Tier 2: Undisclosed Reserves, Hybrid Instruments and Revaluation Assets Risk Weighted Assets=Assets classified in the baskets of 10%, 20%, 50%, 100% (on the basis of quality of assets)

Basel Accord 1:

Basel Accord 1 Drawbacks of Basel Accord 1: The measures were seen to be in conflict with sophisticated internal measures of economic capital The bucket approach with a flat 8% charge for claims on private sector , has led the banks to move high quality assets off their balance sheet, thus reducing the average asset quality Unable to recognize credit risk mitigation tech

BASEL ACCORD II:

BASEL ACCORD II

PILLAR I- Minimum Capital Requirement:

PILLAR I- Minimum Capital Requirement Capital for Credit Risk Standardized approach Risk weights assigned by borrower’s credit rating agencies. Internal Ratings based approach –Foundation and Advanced Internal ratings by banks are used.

Slide10:

Capital for Operational Risk Basic Indicator Approach Fixed percentage of the average of gross income for 3 years Standardized Approach Risk measured based on division of Bank’s business into 8 lines and respective exposure Advanced Measurement Approach Risk measure generated by internal operational risk measurement system

Slide11:

Capital for Market Risk VaR measure Value At Risk measure is calculated on the bank’s current portfolio to measure the impact of the current market factors on the portfolio.

Capital to Risk Weighted Asset Ratio:

Capital to Risk Weighted Asset Ratio CRAR = (TIER 1 Capital + TIER 2 Capital) / (Credit RWA + Market RWA + Operational RWA) *RWA- Risk Weighted Assets As per RBI, banks in India must maintain a CRAR of 9%

PILLAR 2 SUPERVISORY REVIEW PROCESS:

PILLAR 2 SUPERVISORY REVIEW PROCESS It is a regulatory response to the first pillar. Ensures maintenance of minimum capital by banks. Monitors and guides banks on risk management of its assets.

Functions of supervisor:

Functions of supervisor Ensuring banks have a process to assess minimum capital requirements. Reviewing these assessments. Ensure banks maintain capital above the minimum requirement. Prevent capital from falling below the minimum levels.

PILLAR 3 : MARKET DISCIPLINE :

PILLAR 3 : MARKET DISCIPLINE Transparency Monitor risk-taking behavior of banks Institutional framework Information Incentives Control

MD Framework:

MD Framework

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