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.