Basel is a city in Switzerland which is also the headquarters of Bureau of

International Settlement (BIS).

BIS fosters co-operation among central banks with a common goal of
financial stability and common standards of banking regulations.
The Bank for International Settlements (BIS) established on 17 May 1930,is the
world's oldest international financial organization. There are two representative
offices in the Hong Kong and in Mexico City. In total BIS has 60 member
countries from all over the world and covers approx 95% of the world GDP.

OBJECTIVE-
The set of agreement by the BCBS(BASEL COMMITTEE ON BANKING
SUPERVISION), which mainly focuses on risks to banks and the financial
system are called Basel accord. The purpose of the accord is to ensure that
financial institutions have enough capital on account to meet obligations and
absorb unexpected losses. India has accepted Basel accords for the banking
system.
Up till now BASEL ACCORD has given us three BASEL NORMS which are
BASEL 1,2 and 3 but before coming to that we have to understand following
terms-
 CAR/CRAR- Capital Adequacy Ratio/ Capital to Risk Weighted Asset
Ratio

 RWA- Risk Weighted Assets

Formulae for CAR=Total Capital/RWA*100
Now here, Total Capital= Tier1+ Tier2 capital

Tier 1 - The Tier-I Capital is the core capital…….

For example - Paid up Capital , Statutory Reserves, Other disclosed free
reserves, Capital Reserves which represent surplus arising out of the sale
proceeds of the assets, other intangible assets are belongs from the category of
Tier1 capital.

Tier 2 - Tier-II capital can be said to be subordinate capitals.

For example - Undisclosed reserves, Revaluation Reserves, General
Provisions and loss reserves , Hybrid debt capital instruments such as bonds,
Long term unsecured loans, Debt Capital Instruments etc are belongs from the
category of Tier2 capital.

RISK WEIGHTED ASSETS -

RWA means assets with different risk profiles; it means that we
all know that is much larger risk in personal loans in
 comparison to the housing loan, so with different types of loans
the risk percentage on these loans also varies.

BASEL-1
 In 1988,The Basel Committee on Banking Supervision (BCBS) introduced
capital measurement system called Basel capital accord,also called as Basel 1. .
It focused almost entirely on credit risk, It defined capital and structure of risk
weights for banks.
 The minimum capital requirement was fixed at 8% of risk weighted assets
(RWA).
 India adopted Basel 1 guidelines in 1999.

BASEL-2
 In 2004, Basel II guidelines were published by BCBS, which
were considered to be the refined and reformed versions of
Basel I accord.
 The guidelines were based on three parameters which are as
follows-
 Banks should maintain a minimum capital adequacy requirement of 8% of
risk assets.
 Banks were needed to develop and use better risk management techniques
in monitoring and managing all the three types of risks that is credit
and increased disclosure requirements.
 The three types of risk are- operational risk, market risk, capital risk.
 Banks need to mandatory disclose their risk exposure, etc to the central
bank.
 Basel II norms in India and overseas are yet to be fully implemented.

 The three pillars of BASEL-3 can be understand from the following figure---
 BASEL-3

 In 2010, Basel III guidelines were released. These guidelines

were introduced in response to the financial crisis of 2008.
 In 2008, Lehman Brothers collapsed in September 2008, the need for
a fundamental strengthening of the Basel II framework had become apparent.
 Basel III norms aim at making most banking activities such as
their trading book activities more capital-intensive.
 The guidelines aim to promote a more resilient banking system
by focusing on four vital banking parameters viz. capital,
leverage, funding and liquidity.
 Presently Indian banking system follows basel II norms.
 The Reserve Bank of India has extended the timeline for full implementation of
the Basel III capital regulations by a year to March 31, 2019.
IMPORTANT POINTS REGARDING TO THE IMPLEMENTATION OF
BASEL-3

 Government of India is scaling disinvesting their holdings in PSBs to 52

per cent.
 Government will soon infuse Rs 6,990 crore in nine public sector banks
including SBI, Bank of Baroda (BoB), Punjab National Bank (PNB) for
enhancing their capital and meeting global risk norms.
 This is the first tranche of capital infusion for which the government had
allocated Rs 11,200 crore in the Budget for 2014-15.
 The government has infused Rs 58,600 crore between 2011 to 2014 in
the state-owned banks.
 Finance Minister Arun Jaitley in the Budget speech had said that "to be
in line with Basel-III norms there is a requirement to infuse Rs 2,40,000
crore as equity by 2018 in our banks. To meet this huge capital
requirement we need to raise additional resources to fulfill this obligation
Banking Awareness: BIS & Basel Norms
The Bank for International Settlements (BIS) established on 17 May 1930,is the world's
oldest international financial organisation. The BIS has 60 member central banks,
representing countries from around the world that together make up about 95% of world
GDP.The head office is in Basel,Switzerland and there are two representative offices: in the
Hong Kong Special Administrative Region of the People's, Republic of China and in Mexico
City.

The mission of the BIS is to serve central banks of different of nations in their pursuit of
monetary and financial stability, to foster international cooperation in those areas and to act
as a bank for central banks.The Basel Committee is the primary global standard setter for the
prudential regulation of banks and provides a forum for cooperation on banking supervisory
matters.

NORMS ISSUED BY BIS

Basel I
In 1988,The Basel Committee on Banking Supervision (BCBS) introduced capital
measurement system called Basel capital accord,also called as Basel 1. It focused almost
entirely on credit risk. It defined capital and structure of risk weights for banks. The
minimum capital requirement was fixed at 8% of risk weighted assets (RWA). RWA means
assets with different risk profiles. For example, an asset backed by collateral would carry
lesser risks as compared to personal loans, which have no collateral. India adopted Basel 1
guidelines in 1999.The Basel I Accord, issued in 1988, has succeeded in raising the total level
of equity capital in the system.Like many regulations, it also pushed unintended
consequences; because it does not differentiate risks very well, it perversely encouraged risk
seeking. It also promoted the loan securitization that led to the unwinding in the subprime
market.

Basel II
In June 1999, the Committee issued a proposal for a new capital adequacy framework to
replace the 1988 Accord. This led to the release of the Revised Capital Framework in June
2004. Generally known as‟Basel II”, the revised framework comprised three pillars, namely
minimum capital, supervisor review and market

discipline.
Minimum capital is the technical, quantitative heart of the accord.Banks must hold capital
against 8% of their assets, after adjusting their assets for risk.Supervisor review is the process
whereby national regulators ensure their home country banks are following the rules.
If minimum capital is the rule book, the second pillar is the referee system.Market discipline
is based on enhanced disclosure of risk. This may be an important pillar due to the
complexity of Basel. Under Basel II, banks may use their own internal models (and gain
lower capital requirements) but the price of this is transparency.

Basel III
Even before Lehman Brothers collapsed in September 2008, the need for a fundamental
strengthening of the Basel II framework had become apparent.The banking sector had entered
the financial crisis with too much leverage and inadequate liquidity buffers.Responding to
these risk factors, the Basel Committee issued Principles for sound liquidity risk management
and supervision in the same month that Lehman Brothers failed. In July 2009, the Committee
issued a further package of documents to strengthen the Basel II capital framework, notably
with regard to the treatment of certain complex securitisation positions, off balance sheet
vehicles and trading book exposures. In September 2010, the Group of Governors and Heads
of Supervision announced higher global minimum capital standards for commercial banks.
This followed an agreement reached in July regarding the overall design of the capital and
liquidity reform package, now referred to as“Basel III”.

INDIA AND BASEL NORMS:

 Presently indian banking system folllows basel II norms.

 The Reserve Bank of India has extended the timeline for full implementation of the
Basel III capital regulations by a year to march 31,2019.March 31, 2019.
 Around 10 public sector banks (PSBs) will get a total capital infusion of Rs 12,517
crore from the government before this financial year ends.
 Government of India is scaling disinvesting their holdings in PSBs to 52 per cent.
 What are the objectives / aims of the Basel III measures ?

Basel 3 measures aim to:



 → improve the banking sector's ability to absorb shocks arising from financial and
economic stress, whatever the source
 → improve risk management and governance
 → strengthen banks' transparency and disclosures.

Thus we can say that Basel III guidelines are aimed at to improve the ability of banks to
withstand periods of economic and financial stress as the new guidelines are more
stringent than the earlier requirements for capital and liquidity in the banking sector.

How Does Basel III Requirements Will Affect Indian Banks :

The Basel III which is to be implemented by banks in India as per the guidelines issued
by RBI from time to time, will be challenging task not only for the banks but also for
GOI. It is estimated that Indian banks will be required to rais Rs 6,00,000 crores in
external capital in next nine years or so i.e. by 2020 (The estimates vary from
organisation to organisation). Expansion of capital to this extent will affect the returns
on the equity of these banks specially public sector banks. However, only consolation
for Indian banks is the fact that historically they have maintained their core and overall
capital well in excess of the regulatory minimum.

The basic structure of Basel III remains unchanged with three mutually reinforcing
pillars.
Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets
(RWAs) : Maintaining capital calculated through credit, market and operational risk
areas.
Pillar 2 : Supervisory Review Process : Regulating tools and frameworks for dealing
with peripheral risks that banks face.
Pillar 3: Market Discipline : Increasing the disclosures that banks must provide to
increase the transparency of banks

What are the Major Changes Proposed in Basel III over earlier Accords i.e. Basel I and
Basel II?
What are the Major Features of Basel III ?

(a) Better Capital Quality : One of the key elements of Basel 3 is the introduction of
much stricter definition of capital. Better quality capital means the higher loss-
absorbing capacity. This in turn will mean that banks will be stronger, allowing them
to better withstand periods of stress.

(b) Capital Conservation Buffer: Another key feature of Basel iii is that now banks
will be required to hold a capital conservation buffer of 2.5%. The aim of asking to
build conservation buffer is to ensure that banks maintain a cushion of capital that can
be used to absorb losses during periods of financial and economic stress.

(c) Countercyclical Buffer: This is also one of the key elements of Basel III. The
countercyclical buffer has been introducted with the objective to increase capital
requirements in good times and decrease the same in bad times. The buffer will slow
banking activity when it overheats and will encourage lending when times are tough i.e.
in bad times. The buffer will range from 0% to 2.5%, consisting of common equity or
other fully loss-absorbing capital.
(d) Minimum Common Equity and Tier 1 Capital Requirements : The minimum
requirement for common equity, the highest form of loss-absorbing capital, has been
raised under Basel III from 2% to 4.5% of total risk-weighted assets. The overall Tier
1 capital requirement, consisting of not only common equity but also other qualifying
financial instruments, will also increase from the current minimum of 4% to 6%.
Although the minimum total capital requirement will remain at the current 8% level,
yet the required total capital will increase to 10.5% when combined with the
conservation buffer.

(e) Leverage Ratio: A review of the financial crisis of 2008 has indicted that the value
of many assets fell quicker than assumed from historical experience. Thus, now Basel
III rules include a leverage ratio to serve as a safety net. A leverage ratio is the relative
amount of capital to total assets (not risk-weighted). This aims to put a cap on swelling
of leverage in the banking sector on a global basis. 3% leverage ratio of Tier 1 will be
tested before a mandatory leverage ratio is introduced in January 2018.

(f) Liquidity Ratios: Under Basel III, a framework for liquidity risk management will
be created. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio
(NSFR) are to be introduced in 2015 and 2018, respectively.

(g) Systemically Important Financial Institutions (SIFI) : As part of the macro-

prudential framework, systemically important banks will be expected to have loss-
absorbing capability beyond the Basel III requirements. Options for implementation
include capital surcharges, contingent capital and bail-in-debt.

All You Need to Know About BASEL III Norms

The Basel committee on Banking Supervision (BCBS) was formed in

1974 by a group of central bank governors of G-10 countries. Later
on the committee was expanded to include members from nearly 30
countries. BCBS in 1988 released Basel-I accords and subsequently
to overcome the loopholes in it Basel–II was released in 2004.
BCBS released a comprehensive reform package in Dec 2010, which
is called as Basel–III, a global regulatory framework for more resilient
banks and banking systems. These recommendations cover almost all
the nations. And it amend the Basel-2 guidelines, also introduces
some new concepts and recommendations.
The question now arises when we already have defined norms in
place then what is the need for new norm? Let’s discuss it in
detail.

Need For BASEL-3 Worldwide:

Banks mainly deals with three kind of risks. These are

1. Credit risk
2. Market risk
3. Operational risk
What is Credit risk?
It is basically the risk of loss, arising when a borrower is not capable of
paying back the loan as promised. Such borrowers are also known as
Sub-prime borrowers.
Now lets go back to the year 2008 ,when all of us observed
/witnessed the Global financial crisis ,which originated in US
because of these Subprime borrowers and this crisis thereafter
spilled over in the other markets as well. It created financial crisis
throughout the world.
Thus a need was felt for more stringent banking regulation
worldwide.
Now In India what is the need to adopt such norms when we saw
our banking system standing firm even during the crisis.
Need for Basel–III in INDIA
1. Firstly, The most important reason is that as India connects with
the rest of the world, and as increasingly Indian banks go abroad and
foreign banks come on to our shores, we cannot afford to have a
regulatory deviation from global standards. Any deviation will hurt us.
2. Secondly, if we ought to maintain a low standard regulatory regime
this will put Indian banks at a disadvantage in global competition.
Therefore, It is becomes important that Indian banks have
the cushion provided by this risk management system to withstand
shocks from external systems, especially as we deepen our links
with the global financial system.
In India, Basel III regulations has been implemented from April 1,
2013 in phases
 and it will be fully implemented as on March 31, 2019.
The pillars of BASEL norms:
1. Capital adequacy requirements
2. Supervisory review

3. Market discipline

Recommendations of Basel–III

Firstly, Basel-3 recommended that the Capital Adequacy ratio

(CAR) be increased to 8% internationally, while in INDIA it is 9%.
Capital Adequacy ratio(CAR), also known as
Capital to Risk (weighted) Assets Ratio (CRAR),
is a ratio of a bank’s capital to its risk.
Capital is the money a bank receives in exchange for issuing shares.
This capital is further classified into two – Tier 1 and Tier 2 capital.
Out of the 9% (of RWA) capital adequacy requirement, 7%(of RWA)
has to be met by Tier 1 capital while the remaining 2%(of RWA) by
Tier 2 capital.
Risk weighted assets- Every bank assigns its assets some weight-
age based on the risk involved.Thus apply a weight percentage to
each of its assets.
For example–
Lets say a bank lends Rs 100 to a person for home loan and Rs
100 to a person to start a new company.
Bank's total asset = Rs 100 + Rs 100 = Rs 200
Let's imagine home loan has high probability of being repaid than the
loan to person to start a company.
i.e. Risk Weight of Home Loan = 50% and Risk Weight of loan for
company = 90%
Risk Weighted Assets of Bank = 50% of 100 + 90% of 100 = 50 + 90 =
Rs. 140. So out of total assets worth Rs. 200, Rs. 140 are risk
weighted assets.
Bank need 9% of RWA as Capital.
Bank need 9% of 140 = Rs. 12.6 as Capital.
Means, out of Rs. 200 that a bank lends, Rs. 12.6 must be funded
with Capital. Rest, Rs. 187.4 can be from the money that bank
borrowed.
Secondly it also introduces the concept of leverage ratio, it measures
the ratio of banks total assets to bank’s capital. Under the new set of
guidelines, RBI has set the leverage ratio at 4.5% (3% under Basel III).
Leverage Ratio = Capital/Total Asset
Concept of leverage – for e.g.
If you have Rs. 100 and you invest them and earns a profit of 10% i.e.
you have profit of Rs. 10 on Rs. 100. This is called non leverage
profit.
Now again you have Rs. 100 and you borrow Rs. 400 and invest Rs.
500, earns a profit of 10% i.e. you earn Rs. 50 on your Rs. 100.
This is called leverage profit.
With Higher leverage, Bank's Profit/Loss = Higher = Higher Risk
also!
So now leverage ratio of 4.5% means for every Rs bank funds itself
with, it can lend up to 22.22 Rs.
Challenges For It's Implementation In India
1. Capital- Since nearly 2.4 lakh crore rupees are required for its
implementation in India.
2. Liquidity- During the global crisis 2008, the apparently strong
banks of the world ran into difficulties when the inter bank wholesale
funding market witnessed a seizure. Thus in Indian context, it would
mean an additional burden of maintaining liquidity along with the SLR
requirement.
3. Technology- BCBS is in the process of making significant changes
in standard approach for computing RWAs for all three risk areas.
Banks may need to upgrade their systems and processes to be able to
compute capital requirements based on revised standard approach.
4. Skill development- Implementation of the new capital accord
requires higher specialized skills in banks.
5. Governance- One can have the capital, the liquid assets and the
infrastructure. But corporate governance will be the deciding factor in
the ability of a bank to meet the challenges. Strong capital gives
financial strength, it cannot assure good performance unless backed
by good corporate governance.
Steps Taken by Government
(i) GOI has allowed banks to access markets to raise capital while
maintaining a minimum 52% shareholding.
(ii) Govt. also launched a scheme called INDRADHANUSH to revamp
PSBs. This scheme seeks to improve the efficiency and functioning of
banks thereby reducing the bad assets. And also plans to infuse Rs
70,000 crore in the banking system over next 5 years.
In this regard government also announced two banks as DSIBs i.e.
SBI and ICICI, based on the criteria of size, interconnectedness,
complexity and substitutability.
Note: According to new Basel-III norms, which kick in from March
2019, Indian banks need to maintain a minimum capital adequacy ratio
(CAR) of nine per cent, in addition to a capital conservation buffer,
which would be in the form of common equity at 2.5 per cent of the
risk weighted assets