What are BASEL Banking Norms/Accords ?

What are BASEL Banking Norms ?

Basel is a city in Switzerland which is also the headquarters of Bureau of International Settlement (BIS). 

BIS appointed a committee to supervise and to set some standards. Currently there are 27 member nations in the committee. 

Basel guidelines refer to broad supervisory standards formulated by this group of central banks- called the Basel Committee on Banking Supervision (BCBS).

The Guideline issued by this committee which mainly focuses on risks to banks and the financial system are called Basel accord.

The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses. India has accepted Basel accords for the banking system. 

BASEL-I :

BCBS introduced capital measurement system called Basel capital accord in 1988, also called as Basel 1.

India adopted Basel 1 guidelines in 1999.

This Accord 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. 

BASEL-II :

In 2004, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord.

The guidelines were based on three parameters.

Minimum Capital Requirement of 8 percent of RWA.

Supervisory Review process

Market Discipline

Banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that is  credit  and  increased disclosure requirements. 

Basel II norms in India and overseas are yet to be fully implemented.

BASEL-III : 

Basel III guidelines were released in 2010.

These guidelines were introduced in response to the financial crisis of 2008.

It is set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.

These measures aims to :

improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source

improve risk management and governance

strengthen banks' transparency and disclosures.

The Basel III which is to be implemented by banks in India as per the guidelines issued by RBI from time to time, will be challenging task not only for the banks but also for GOI.  It is estimated that Indian banks will be required to rais Rs 6,00,000 crores in external capital in next nine years or so i.e. by 2020