Basel Norms II
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Transcript of Basel Norms II
8/8/2019 Basel Norms II
http://slidepdf.com/reader/full/basel-norms-ii 1/19
Rasleen Kaur
Sakshi Goenka
Abhishek passi
8/8/2019 Basel Norms II
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Introduction
Second of the Basel Accords
Issued by Basel Committee on Banking
Supervision in 2004 Capital a bank should set aside to guard
against :
- financial risk
- operational risk
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Objectives
To have enough capital on account to
meet obligations and absorb unexpected
losses
To ensure capital allocation is more risk
sensitive
To separate operational risk from credit
risk
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Three pillars
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Pillar I - Min. Capital Req.
Market Risk :
Risk of losses in on and off balance-
sheet positions arising from movementsin market prices
Factors contributing:
y Equity
y interest rate
y foreign exchange
y commodity risk
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Pillar I (contd.)
Credit Risk:
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Operational Risk:
Loss resulting from inadequate or failed
Internal processes
People
Systems or
External events
Pillar I (contd.)
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Calculation of CAR
CAR = Total Capital
Risk weighted assets
Total capital = Tier I Capital + Tier II Capital
y Tier I Capital = Ordinary Capital+ Retained
Earnings& Share Premium - Intangible assets
y Tier II Capital = Undisclosed Reserves+ General
Bad Debt Provision+ Revaluation Reserve +
Subordinate debt+ Redeemable Preference shares
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Capital Adequacy Ratio
Indicates a bank's risk-taking ability
To check availability of enough capital toabsorb unexpected losses or risks
involved Higher the risk, more the capital back up
required
Basel I: CAR based only on credit risk Basel II: CAR based on market, credit
and operational risk
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Minimum Requirement of CAR
8% is prescribed Capital Adequacy Norm
CAR= 9% (Scheduled Commercial Banks)
CAR = 10% (New Private Sector Banks)
CAR = 10% (Banks undertaking Insurance
Business)
CAR =15% (Local Area Banks)
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Pillar II-Supervisory Review
To adopt better risk management techniques
To mandate a higher capital requirement
Risks covered:
CR,MR,OR
Credit concentration risk
Interest rate risk in banking book
Liquidity risk
Business risk
Strategic risk
Reputation risk
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Pillar III- Market Discipline
Disclosure for market discipline
Monitoring by banks, depositors,
analysts, rating agencies
For bank¶s capital adequacy assessment
Qualitative disclosures (risk managementobjectives and policies, definitions)
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Capital Arbitrag e and Core Eff ect
of Basel II Regulatory arbitrage
Securitization
Example:Bank with portfolio of commercial loans withthe following ratings and internally generatedcapital requirements
± AA-A: 3%-4% capital needed
± B+-B: 8% capital needed ± B- and below: 12%-16% capital needed
Basel II: bank has to hold 8% risk-basedcapital against all loans
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Bank Loan Rating and Basel ² II
Capital provided by bank against a loan
is based on credit rating assigned
Higher the credit rating, lower the risk
weight
Weaker companies affected:
Charged a higher rate of interest
Approach another bank charging a lower
rate of interest
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Implementation of Basel II(India)
Indian banks to ensure full
implementation of Basel II guidelines by
March 31, 2009
The minimum CAR in India placed at 9%
(1% above the Basel II requirement)
Non-compliance attracts RBI action
(restricting lending and investmentactivities)
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SWOT Analysis of Basel II
Strengths
Aggression towards development of
existing standards by banks
Strong regulatory impact by central bank to
all banks for implementation
Weaknesses Ineffective risk measures
Unfavourable for smaller banks
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SWOT Analysis (contd.)
Opportunities
Increasing risk management expertise
Need significant connection among business,credit and risk management and informationtechnology
Strong asset base would help in growth
Threats
Inability to meet the additional capitalrequirements
Loss of capital to the entire banking system,due to mergers and acquisitions
Huge investments in technologies
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Ref erences
³The Evolution to Basel II´ by Donald
Inscoe
³Basel II ± Challenges Ahead of the
Indian Banking Industry´ by Jagannath
Mishra
Web References:
http://www.bis.org
http://www.rbi.org.in
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