1. BASEL IIBASEL II
Concept &Concept &
ImplicationImplication

2. ConceptConcept Overview:Overview:
 Basel HistoryBasel History
 About Basel IAbout Basel I
 About Basel IIAbout Basel II
 IntroductionIntroduction
 DefinitionDefinition
 Three Pillar ApproachThree Pillar Approach
 Advantages & DrawbacksAdvantages & Drawbacks
 Implementation progressImplementation progress
 Basel I Vs Basel IIBasel I Vs Basel II
 Challenges with Indian banking industry.Challenges with Indian banking industry.
 Implication.Implication.

3. Basel History…
 Basel Committee was constituted by the Central Bank
Governors of the G-10 countries.
 The Committee's Secretariat is located at the Bank for
International Settlements in Basel, Switzerland.
 Its objective is to enhance understanding of key supervisory
issues and quality improvement of banking supervision
worldwide.
 This committee is best known for its international standards
on capital adequacy; the core principles of banking
supervision and the concordat on cross-border banking
supervision.

4. Basel I
Basel I is the round of deliberations by central
bankers from around the world, and in 1988,
the Basel committee (BCBS) in Basel,
Switzerland, published a set of minimal
capital requirements for banks.
It primarily focused on credit risk .
Basel I is now widely viewed as outmoded,
and a more comprehensive set of guidelines,
known as Basel II are in the process of
implementation by several countries.

5. Basel II
 Basel II is a type of recommendations on banking
laws and regulations issued by the Basel
Committee on Banking Supervision that was
initially published in June 2004.
 The objective of Basel II is to create an
international standard that banking regulators
can use when creating regulations about how
much capital banks need to put aside to guard
against the types of financial and operational
risks banks face.
 Basel II includes recommendations on three main
areas: risks, supervisory review, and market
discipline.

6. The Accord in
operation
The 3 Pillar Approach
Minimum Capital Requirements
Supervisory Review
Market Discipline & Disclosure

7. The First Pillar..
 The first pillar deals with maintenance of
regulatory capital calculated for three
major components of risk that a bank faces:
credit risk, operational risk and market risk
. Other risks are not considered fully
quantifiable at this stage.

8. The Second Pillar..
 The second pillar deals with the regulatory
response to the first pillar, giving regulators
much improved 'tools' over those available to
them under Basel I.
 It also provides a framework for dealing with
all the other risks a bank may face, such as
systemic risk, pension risk, concentration risk
, strategic risk, reputation risk, liquidity risk
and legal risk, which the accord combines
under the title of residual risk. It gives bank a
power to review their risk management
system.

9. The Third Pillar..
 The third pillar greatly increases the
disclosures that the bank must make. This is
designed to allow the market to have a
better picture of the overall risk position of
the bank and to allow the counterparties of
the bank to price and deal appropriately.

10. Advantages..
 Takes global aspect into consideration for more rational
decision making, improving the decision matrix for banks.
 Makes better business standards.
 Reduces losses to the banks.
 Improving overall efficiency of banking and finance systems.
 Allowing capital allocation based on ratings of the borrower
making capital more risk-sensitive.
 Provides range of alternatives to choose from.
 Incorporates sensitivity to banks.
 Encouraging mergers and acquisitions and more collaboration
on the part of the banks, this ultimately leads to proper control
over their capital and assets.

11. Drawbacks…Drawbacks…
 Dealing with diversity.Dealing with diversity.
 Lack of data on internal ratings andLack of data on internal ratings and
modeling.modeling.
 Credit risk reduction.Credit risk reduction.
 Cyclical fluctuations in bank lending.Cyclical fluctuations in bank lending.
 Competition among banks.Competition among banks.
 Financial innovations.Financial innovations.

12. Basel I VS Basel II
 Basel I is very simplistic in its approach
towards credit risks. It does not distinguish
between collateralized and non-
collateralized loans, while Basel II tries to
ensure that the anomalies existed in Basel I
are corrected.

13. Challenges with Indian Banking
Industry..
 With the feature of additional capital requirements, the overall
capital level of the banks will see an increase. But, the
banks that will not be able to make it as per the norms may be
left out of the global system.
 Another biggest challenge is re-structuring the assets of
some of the banks would be a tedious process, since most of
the banks have poor asset quality leading to significant
proportion of NPA. This also may lead to Mergers &
Acquisitions, which itself would be loss of capital to entire
system.
 The new norms seem to favor the large banks that have
better risk management and measurement expertise, who
also have better capital adequacy ratios and
geographically diversified portfolios.

14. Conti…
Challenges with Indian Banking
Industry..
 Implementation of the Basel II will require huge
investments in technology. According to estimates, Indian
banks, especially those with a sizeable branch network, will need
to spend well over $ 50-70 Million on this.
 Experts say that dearth of risk management expertise in the
Asia Pacific region will serve as a hindrance in laying
down guidelines for a basic framework for the new capital
accord.
 The technology infrastructure in terms of computerization
is still in a nascent stage in most Indian banks.
Computerization of branches, especially for those banks, which
have their network spread out in far-flung areas, will be a
daunting task.

15. Implications..Implications..
 The Basel Committee on Banking Supervision is a Guideline forThe Basel Committee on Banking Supervision is a Guideline for
Computing Capital for Incremental Risk.Computing Capital for Incremental Risk.
 It is a new way of managing risk and asset-liability mismatches,It is a new way of managing risk and asset-liability mismatches,
like asset securitization, which unlocks resources and spreads risk,like asset securitization, which unlocks resources and spreads risk,
are likely to be increasingly used.are likely to be increasingly used.
 The major challenge the country's financial system faces today isThe major challenge the country's financial system faces today is
to bring informal loans into the formal financial system.to bring informal loans into the formal financial system. ByBy
implementing Basel II norms, our formal banking system can learnimplementing Basel II norms, our formal banking system can learn
many lessons from money-lenders.many lessons from money-lenders.
 This was designed for the big banks in the BCBS memberThis was designed for the big banks in the BCBS member
countries, not for smaller or less developed economies.countries, not for smaller or less developed economies.

16. Implications..Implications..
 Keeping in view the cost of compliance for both banks andKeeping in view the cost of compliance for both banks and
supervisors, the regulatory challenge would be to migrate tosupervisors, the regulatory challenge would be to migrate to
Basel II in a non-disruptive manner.Basel II in a non-disruptive manner.
 India is one of the early countries which subjected itselfIndia is one of the early countries which subjected itself
voluntarily to the FSAP of the IMF, and our system wasvoluntarily to the FSAP of the IMF, and our system was
assessed to be in high compliance with the relevant principles.assessed to be in high compliance with the relevant principles.
 With the gradual and purposeful implementation of theWith the gradual and purposeful implementation of the
banking sector reforms over the past decade, the Indianbanking sector reforms over the past decade, the Indian
banking system has shown significant improvement onbanking system has shown significant improvement on
various parameters, has become robust and displayed amplevarious parameters, has become robust and displayed ample
resilience to shocks in the economy.resilience to shocks in the economy.
 There is, therefore, ample evidence of the capacity of the IndianThere is, therefore, ample evidence of the capacity of the Indian
banking system to migrate smoothly to Basel II.banking system to migrate smoothly to Basel II.

17. Thank youThank you