BASEL norms are nothing but an evolved system to protect public funds deposited with the Banks, which, in turn, lend it to the borrowers that exposes Banks to variety of risks. Norms have dictionary meaning of “An accepted standard or way of doing things that most people agree with”. In other words, a standard accepted by the global banking system of Bank of International Settlement (BIS) member countries. BIS is an international financial organisation that works with the central bank of different countries with uniform goal of achieving financial stability and to regulate common business standards in the country. Head Quarters of this organisation is in Basel, Switzerland. Hence, it is called Basel norms. There are 60 member countries or central banks are members of BIS. This is the oldest global financial institution and operates under aegis of International Law. The Basel Committee on Banking Supervision (BCBS) is the body that sets global standards for financial stability & Banking supervision issues. The set of agreement by the BCBS, which emphasizes on risks to Banks and the Financial System is called Basel Accord.
Basel I Accord
This was introduced by BCBS in 1988, however, India adopted it in 1999. Under this accord, the minimum capital requirement was set at 8% of risk-weighted assets (RWA). RWA is minimum amount of capital that must be maintained by the Banks to mitigate risk of insolvency.
Basel II Accord
Reformed version of Basel I accord was published in 2004, which were based on 3 parameters.
* Banks were required to maintain minimum capital adequacy of 8% of risk-weighted assets.
*·Banks were needed to develop and use better risk management techniques in monitoring and managing credit, market and operational risks that a Bank encounters.
* Under Market discipline, Banks were required to disclose Capital Adequacy Ratio (CAR) and risk exposure to Central Bank of respective countries.
Basel III Accord
In view of the financial crisis of 2008, it was felt to enhance the existing set of parameters. It was contemplated to extend the system as Banks in the developed economies were under-capitalized, over-leveraged and had resorted to short term lending. Accordingly, revised guidelines, introduced in 2010, aim to promote more flexible banking system by enhancing focus on Capital, Leverage, Funding and liquidity. The objective is to:-
* Enhance the banking sector’s ability to absorb shocks arising from financial and economic stress.
* Enhance risk management and governance.
* Enhance Bank’s transparency and disclosures.
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