(Bank Policy) BASEL

8/9/2019 (Bank Policy) BASEL

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CAPITAL ADEQUACY NORMS:

BASEL II


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2

Table of Contents

1.BASEL II & THREE PILLARS

3.CAPITAL ADEQUACY RATIO,

TIER 1,2 & 3

4.ISSUES, RBI APPROACH, IMPLICATIONS

AND CONCLUSIONS

2.FIRST PILLAR, CREDIT RISK,MARKET RISK AND OPERATIONAL

RISK

BASEL II


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OVERVIEW

Basel I, published in 1988 is framework for measuring capital

adequacy and a minimum ratio to be achieved by the banks

Implemented in India in 1992

On 26 JUNE 2004, BCBS released a revised framework,

known as Basel II Framework

Capitalizes on the modern risk management techniques


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Why BASEL 2FOCU

S AREA BASEL I BASEL IIRisk measure Single risk measure Counterparty and transaction

specific risk

measures

Risk sensitivity Broad brush approach Granularity and risk sensitivity

Credit risk mitigation Broad brush approach Comprehensive recognition

Operational risk Excluded Included

Counterparty credit risk Broad brush approach Menu of approaches

Range of risks Narrow Far more extensive

Flexibility One size fits all Menu of approaches

Supervisory review Implicit and opaque Explicit and more transparent

Market discipline None Market given explicit

information and role

Incentives None Explicit and well defined

Economic capital Divergence Convergence


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BASEL II

BASEL II FRAMEWORK

PILLAR I

MINIMUM CAPITAL

REQUIREMENTS

PILLAR II

SUPERVISORY REVIEW

PROCESS

PILLAR III

MARKET DISCIPLINE


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Types of risk

Capital components

Credit Risk Market Risk Operational Risk


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Credit risk

It is the risk that borrowers may fail to make timely

repayment of loan, interest and other terms of contract.

Factors affecting credit risk

Exposure at default

Loss given default

Probability of default


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CREDIT RISK-Measurement

Methodologies


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Standardized Approach

The bank allocates a risk weight to the assets

depending on rating given by credit rating agencies.

The bank allocates a risk weight to each of its assets

and off-balance sheet positions and produces a sum of

risk weighted asset values


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Internal Rating Based (IRB) Approach

Bank uses internal estimates of risk portfolios to assess creditrisk. The bank estimates the credit worthiness and future

estimated loss ascertained.

Risk components:- Probability of default

Loss given default

Exposure at default

Effective maturity


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Securitization Framework

It is used for determining regulatoryrequirement on exposure arising from

securitization.


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Market risk

Reduction in Investment due to moves in marketforces.

Equity risk

Interest rate risk

Currency risk

Commodity risk


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Operational Risk

Basic approach Standardized

approach

Advanced approach

Gross income for

the bank-15 %

Gross income by

business line,12-18

%

Own empirical

model to quantify

capital

Simple, for minimal

operation risk

Specific criteria Specific criteria

Minimum standards Effective operational

risk management

Quantitative/qualita

tive factors


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Table of Contents

1.BASEL II & THREE PILLARS

3.CAPITAL ADEQUACY RATIO,

TIER 1,2 & 3

4.ISSUES, RBI APPROACH, IMPLICATIONS

AND CONCLUSIONS

2.FIRST PILLAR, CREDIT RISK,MARKET RISK AND OPERATIONAL

RISK

BASEL 2


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CAPITAL ADEQUACY RATIO??

A measure of a bank's capital. It is expressed as a

percentage of a bank's risk weighted credit exposures

and calculated as given below

CAR= (TIER I + TIER II + TIER III)CAPITAL

Credit risk + Operational Risk + Market risk


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TIER I CAPITAL

A term used to describe the capital adequacy of a bank. Tier Icapital is core capital, this includes equity capital and disclosedreserves

Components of Tier I Capital: Paid up capital

Statutory reserves

Disclosed free reserves

Capital reserves representing surplus arising out of sale proceedsof assets.


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ISSUES AND CHALLENGES

Capital requirement

Profitability

Risk management planning

Rating requirement


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RBI APPROACH

Steering committee for consultation

Deadline extended from 31 March,2008 to 31 March,2009

Adopt Standardised Approach for credit risk

Adopt Basic Indicator Approach for operational risk

indicative set of weights by RBI


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IMPLICATIONS

Indian banks would need additional capital to the extent of Rs.120 billionto meet the capital charge requirement for operational risk

Emphasis on the foreign ownership of banking assets in India

Foreign investment limits in private banking hiked to 74 percent

One track is consolidation of the domestic banking system in both publicand private sectors. The second track is gradual enhancement of thepresence of foreign banks in a synchronised manner - RBI


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CONCLUSIONS

It provides significant incentives to banks to sharpen their riskmanagement expertise to enable more efficient risk-returntrade offs.

Presents a valuable opportunity to gear up their internalprocesses to the international best standards.

It requires substantial capacity building and commitment of

resources through close involvement of the banks TopManagement in guiding this arduous undertaking


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BASEL II IS RE-REGULATION


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REFRENCES

www.rbi.org.in

www.bis.org

ICRA Rating Feature, March 2006

Basel Norms- Challenges in India, SWAPAN BAKSHI, The Chartered

Accountant, October 2004

Basel II and India's Banking Structure Mar 3rd 2007, C.P. Chandrasekhar

and JAYANTI GHOSH


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(Bank Policy) BASEL

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