What is Basel Norms ?

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 riskThe 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 preferred stock.

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:-

RISK in percentage
House loan
Education loan
Car loan
Personal loan

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