1. Presented By:
Manish Gidwani 10
Kapil Israni 16

2. OVERVIEW
 Central bank governors of G10 countries
 Capital adequacy framework
 Risk weighted capital adequacy framework

3. FOUNDATION
 Established on 17 May 1930
 The BIS is the world’s oldest
international financial
organization
 Head office is in
Basel, Switzerland and
representative offices in Hong
Kong SAR and in Mexico City.
 The BIS currently employs
around 550 staff from 50
countries.

4. LIST OF MEMBER CENTRAL BANKS
 Algeria  Iceland  Russia
 Argentina  India  Saudi Arabia
 Australia  Indonesia,  Singapore
 Austria  Ireland  Slovakia
 Belgium  Israel  Slovenia
 Bosnia and Herzegovina  Italy  South Africa
 Brazil  Japan  Spain
 Bulgaria  Korea  Sweden
 Canada  Latvia  Switzerland
 Chile  Lithuania  Thailand
 China  The Republic of  Turkey
 Croatia Macedonia  The United Kingdom
 The Czech Republic  Malaysia  The United States
 Denmark  Mexico  The European Central
 Estonia  the Netherlands Bank
 Finland  New Zealand
 France  Norway
 Germany  the Philippines
 Greece  Poland
 Hong Kong SAR  Portugal
 Hungary  Romania

5. BASEL COMMITTEE ON BANKING
SUPERVISION
 A set of agreements
 Regulations and recommendations on Credit
risk , market risk and operational risk
 Purpose – to have enough capital on account to
meet obligations and absorb unexpected losses

6. 1. Credit risk
2. Market risk
a) Interest risk
b) Equity risk
c) Foreign exchange risk
3. Large exposure risk
a) Counter party risk

8. PURPOSE OF BASEL 1
 Strengthen the stability of international
banking system.
 Set up a fair and a consistent international
banking system in order to decrease
competitive inequality among international
banks

9. STRUCTURE OF BASEL I
 Minimum Capital Adequacy ratio was set at 8% and was
adjusted by a loan’s credit risk weight.
 Credit risk was divided into 5 categories viz.
0%, 10%, 20%, 50% and 100%.
 Commercial loans, for example, were assigned to the
100% risk weight category.
 To calculate required capital, a bank would multiply the
assets in each risk category by the category’s risk weight
and then multiply the result by 8%. Thus, a Rs 100
commercial loan would be multiplied by 100% and then
by 8%, resulting in a capital requirement of Rs8.

10. BASEL NORMS
V/S
INDIAN BANKING SYSTEM
 Basel Accord I. was established in 1988 and was
implemented by 1992 in India.
 over 3 years – banks with branches abroad were
required to comply fully by end March 1994 and the
other banks were required to comply by end March
1996.
 RBI norms on capital adequacy at 9% are more
stringent than Basel Committee stipulation of 8%.
 Commercial Banks , Cooperative Banks and Regional
rural banks have different RBI guidelines

11. PITFALLS OF BASEL I
 Negotiated risk weights
 Overemphasis of trading account risk (not included
hedging, diversification, differences in risk
management techniques)
 Static measure of default risk
The assumption that a minimum 8% capital ratio is
sufficient to protect banks from failure does not
take into account the changing nature of default
risk.

12.  Potential counterparty risk

14. OBJECTIVES
 Ensuring that capital allocation is more risk
sensitive;
 Separating operational risk from credit risk, and
quantifying both;
 Attempting to align economic and regulatory
capital more closely to reduce the scope
for regulatory arbitrage.

15. STRUCTURE OF BASEL II

16. The three pillar approach
 Pillar 1 sets out the minimum capital requirements firms will be
required to meet to cover credit, market and operational risk.
 Pillar 2 sets out a new supervisory review process. Requires
financial institutions to have their own internal processes to
assess their overall capital adequacy in relation to their risk
profile.
 Pillar 3 cements Pillars 1 and 2 and is designed to improve
market discipline by requiring firms to publish certain details of
their risks, capital and risk management as to how senior
management and the Board assess and will manage the
institution's risks.

17. The First Pillar
Minimum Capital Requirement
Capital Adequacy Ratio is defined as the amount of regulatory capital to be
maintained by a bank to account for various risks inbuilt in the banking
system. The focus of Capital Adequacy Ratio under Basel I norms was on
credit risk and was calculated as follows:
Capital Adequacy Ratio = Tier I Capital Tier II Capital
Risk Weighted Assets
Basel Committee has revised the guidelines in the year June 2001 known as Basel II
Norms.
Capital Adequacy Ratio in New Accord of Basel II:
Capital Adequacy Ratio = Total Capital (Tier I Capital Tier II Capital)
Market Risk(RWA) + Credit Risk(RWA)
+ Operation Risk(RWA)
*RWA = Risk Weighted Assets

19. The Second Pillar
Supervisory Review Process

20. The Third Pillar
Market Discipline
 Covers transparency and the obligation of banks to disclose meaningful
information to all stakeholders
 Clients and shareholders should have sufficient understanding of activities
of banks, and the way they manage their risks