The Basel
Committee on Banking Supervision (BCBS) is a committee of
banking supervisory authorities that was established by the central bank governors of
the Group
of 10 (G10) countries
in 1974. Basel norms is an international
standard, which was started to give international shape of banking and
financial institution. it was started in Basel in the city of Switzerland,
hence its name was Basel norms/accords.
Basel is a city in Switzerland. It is the headquarter of Bank for
International Settlements (BIS)
established on 17th May 1930,
is the world’s oldest international financial organization. which fosters
co-operation among central banks with a common goal of financial stability and
common standards of banking regulations. Bank for
International Settlements (BIS)
has 60 member countries central bank from all over the world and covers approx
95% of the world GDP. The purpose of
the accord is to ensure that financial institution have enough capital to meet
unexpected/future loss.
Until there are three Basel
agreements have come into existence.
Basel-I :- It was introduce in 1988 and applied in India in 1992. Its main
focused primarily on the risks of bank and financial system or focused almost entirely on credit risk. The
minimum capital requirement was fixed at 8%
of risk weighted assets (RWA).
Basel–II :- It was introduce in 1999 and applied in India
in 2009 its main objective was to deal with international financial risks. The minimum capital requirement was
fixed at 8% to 12%
(India 9%) of risk weighted
assets (RWA).
Basel-III :- It was Introduce in 2010 and will be apply in
India 31 March 2019 . The minimum capital requirement is 10%
to 14% (India has to maintain
11.5%) of risk weighted assets (RWA). This is the new international
standard of proportion of the capital adequacy
of banks. In order to reduce the risk, banks have to keep more capital.
Objective of Basel Norms III
(i) Improve the
efficiency of the banking sector in dealing with fluctuations arising from
financial and economic sustainability.
(ii) Improve risk
management capabilities and administration of the banking sector.
(iii) To
strengthen the transparency and disclosure of the bank.
(iv) To set up a
repository to provide a single view of all categories of financial assets to
investors.
(v) Also
considering the measures for establishing an effective solution mechanism for
the financial sector.
(vi) Compliance
with Basel standard in India is being done with complete commitment, as per
guidelines of Reserve Bank of India, have complied with Basel standards in all
the banks working in India, India will be fully implemented till 2019.
What Is Capital Adequacy Ratio - CAR/CRAR
Capital Adequacy Ratio is also known as Capital to Risk Weighted
Assets Ratio (CRAR) this is the
ratio which protects the bank from future recession/loss. Under this the bank gives
loan to its customers within a certain radius and the bank has to keep a
certain percentage of it, so that the banks can be saved from bankruptcy or
unexpected loss.
formula :-
What is Tier 1 and Tier 2 Capital ?
Tier 1 Capital:- Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is the best capital of bank. Tier 1 capital
is intended to measure a bank's financial health, Tier 1 capital comprises with core capital which includes common stock
and declared reserves but may also include non-redeemable non-cumulative
Tier 2 capital :- Tier 2 capital
includes revaluation reserves, hybrid capital instruments and subordinated term debts, and unknown reserves. Tier 2 capital is supplementary capital because it
is less reliable than tier 1 capital.
What is Risk Weighted Assets- RWA
The bank
gives different types of loans to all its customers, such as House loan, Education
loan, Car loan, Personal loan etc. So the bank determines a risk in all such
types of the loans i.e. the bank thinks that how much loan will be recovered
from the loans and how much is not such categories as defined is called Risk
Weighted Assets (RWA).
For example:-
CATEGORIES
|
RISK in percentage
|
House
loan
|
20%
|
Education
loan
|
30%
|
Car loan
|
20%
|
Personal
loan
|
30%
|
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