Basel Norms 1, 2, 3 PDF Download For Banks Exam – SBI, IBPS, RBI

Basel Norms 1 2 3 PDF

Challenges Faced By Global Banking

1. Risk Management (In term of bank, any such thing that leads future loss to bank called risk. For example, If a bank provide a loan and the bank is not certain paid on time that is called risk. OR Majority of ATM stopped functioning that can also lead to loss.)

2. Misused of Banks (For example, In India, we have government and 27 public sector banks, 51 % of share will be held by government of India. Because 51 % of share used by government, GOI could misused the bank by making them follow certain guidelines which would be detrimental (i.e. not feasible for a bank.))

3. Bank Transparency (If i am uneducated, no idea about bank, i would find it rather difficult to open a account in a bank or to trust bank operation.)

4. Credit Allocation (How much loan can give to a person at correct time. Loan is an asset for a bank but not liability.)

Principles of Global Banking

Challenges -> Solution -> called as Principles of Global Banking

1. Minimum Requirements (Minimum Level -> Required -> Bank -> Follow -> Across the world)

Minimum Requirement For a Bank

For growing a bank, it require a capital but for stable and minimum losses, it require reserve money.

2. Supervisory Review Process (Bank’s Supervisor is RBI. It provides licences and guideline and penalties to the bank.)

3. Market Discipline (RBI would say to bank to publish all your details to public.)

Global Principles of Banking

Credit Risk : Bank has given the loan to one person and bank has doubt of repayment of person. This doubt is called Credit risk. Bank has two primary function (SA/CA/Deposits and loan). Risk is exist in loan for bank. For this, RWA has been launched.

Risk Weighted Assets

Take an example, Consider bank (SABKA APNA BANK) has given the loan to three assumed person.

1. Baba Ji (Very Rich) – 30% of loss [Bank given 100 crore to Baba Ji]

2. Mukesh Ambani (Businessman) – 20 % of loss [Bank has also given 100 crores to Mukesh Ambani.]

3. Arvind Kejriwal (unemployed) – 100% of loss [Bank has given 50 crores to Arvind Kejriwal]

Total RWA = 30 Crore + 20 Crore + 50 = 80 crore

Total loan (Asset) = 250 crore

BASEL COMMITTEE ON BANKING SUPERVISION (BCBS)

The Basel Committee is a advisory/voluntary committee of bank supervisors drawn from 13 member countries (Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, The Netherlands, Spain, Sweden, Switzerland, United Kingdom and United State of America). It was founded in 1974 by Stefan Ingves to ensure international cooperation among a number of supervisory authorities. It usually meets at the Bank for International cooperation among a number of supervisory authorities. The committee framed two capital Accords, Basel I (1998) and Basel II (2004), Basel III (2010). This committee provides the number of guidelines and these guidelines are called Basel norms.

BASEL Norms

Basel is a city in Switzerland. It is the headquarters of Bureau of International Settlement (BIS). The Bank for International Settlements (BIS) established on 17 May 1930 with a common goal of financial stability and common standards of banking regulations. BIS has 60 member countries from all over the world and covers approx 95% of the world GDP.

Capital Adequacy Ratio (CAR) = (Tier 1 capital + Tier 2 capital)/Risk Weighted Assets (RWA)

Tier 1 Capital : Core money that will be used first.

Tier 2 Capital : Supplemental money that will be used secondly.

CRAR : Capital to Risk (Weighted) Assets Ratio (CRAR), is the ratio of a bank’s capital to its risk

BASEL-1

BASEL-1 is brought in 1988. It focused almost entirely on credit risk.The minimum capital requirement was fixed at 8% of risk weighted assets (RWA).India adopted BASEL 1 guidelines in 1999. It follow only first principle of global banking.

BASEL-2

BASEL-2 is brought in 2004. The minimum capital requirement was fixed at 9% of risk weighted assets (RWA). India adopted BASEL2 guidelines in 2009. It follow all three principles of global banking.

BASEL-3

BASEL-3 is brought in 2010. These measure aims to (i) Improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source. (ii) Improve risk management and governance. (iii) Strengthen bank’s transparency and disclosures. The Reserve Bank of India (RBI) has extended the timeline for full implementation of the Basel III capital regulations by a year to march 31, 2019. It follow all three principles of global banking + liquidity + stability.

The government estimates that state-run lenders would require Rs 1.8 lakh (9% of 120 crores RWA) crore over the next four year.

Financial Year Amount (in crore)
2015-16 25
2016-17 25
2017-18 10
2018-19 10

Feature of BASEL 3

1). RWA % = 11.5% (India); 10.5% (Rest)

2). 4.5 % of RWA = Common Equity (Funds of the public)

3). Capital Conservation Buffer : It is a cushion and supplement. 4.5% of RWA

4). Counter Cyclical Buffer : It is an optional buffer. If money supply is more, this buffer will be filled. It provide added  support to the reserve capital. If money supply is becoming low, you can empty buffer.

Difference between Basel 1 and Basel 2 Norms

The differences for Basel 1 and Basel 2 Norms are as follows.

Basel I Basel II
Only Credit Risk (Although included capital for market risk subsequently in 1996.) Credit, Market and Operational Risk
Credit Risk : One measure fits all – Broad brush approach Based on Underlying Risk
Single Risk Measure : Minimum Capital Requirement Package of Minimum Capital Requirement, Supervisory Review Process and Market Discipline working complementary to each other.

Basel Norms 1 2 3 PDF

Candidates can download Basel Norms 1, 2, 3 pdf by clicking on below links.

Basel Norms PDF

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