Basel III Norms

Basel Norm III is also known as the Third Basel Accord or Basel Standards. It is a regulatory framework followed on a voluntary basis on a global scale. The framework deals with capital adequacy in banks, stress testing, and market liquidity risk. 

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What is Basel Norm III?

  1. Basel Norms are the international banking regulations.
  2. Basel III Accord was developed by the Basel Committee on Banking Supervision (BCBS).
  3. In 2010, Basel III guidelines were released.
  4. It was developed in response to the shortcomings in financial regulations exposed during the financial crisis of 2007-08.
  5. It is a set of the agreement by BCBS that focuses on the risks to banks and the financial system.
  6. With the goal of strengthening the international banking system, basel norms put an effort to coordinate banking regulations across the globe.
  7. The objective of Basel Norms III is to increase the liquidity of banks and decrease bank leverage.

What are the 3 Main Pillars or 3 Main Principles of Basel III?

The 3 main pillars or 3 main principles of Basel III are given below.

  1. Minimum Capital Requirements 
  2. Leverage Ratio
  3. Liquidity Requirements

Need of Basel Norms

Banks are exposed to a variety of risks and defaults because of lending to borrowers who carry their own risks. Banks lend money raised from the market as well as the deposits of the public as a result they fall at times. Hence to deal with such situations banks are required to keep aside a certain percentage of capital as security against the risk of non – recovery. The Basel Committee has produced Basel III norms for Banking to tackle this risk.

How Does Basel III Affect Banks?

The Cost of increasing capital ratios may lead banks to raise their lending rates and thereby resulting in a reduction of lending. This will have a significant impact on the economy due to lower investment, lower exports, and lower consumption.

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What is the Basel Committee on Banking Supervision?

  1. Basel Committee on Banking Supervision was established in 1974 by the Governors of Central Banks belonging to a Group of 10 (G-10 ) countries. This was in response to the disruptions in financial markets. Check out the Central Banks Of Different Countries – 200+ List on the linked page.
  2. The objective of this committee is to strengthen the regulations, supervision, and banking practices globally.
  3. Basel Committee reports to the Group of Governors and Heads of Supervision (GHOS).
  4. The Committee was expanded in 2009 to 27 jurisdictions. India was included in this expansion.
  5. Basel Committee has formulated Basel I, Basel II, and Basel III accords.
  6. The secretariat of the Basel Committee on Banking Supervision (BCBS) is located in Basel, Switzerland at the Bank for International Settlements (BIS).

Basel I Norms

India adopted Basel-I Norms guidelines in 1999.

  • Basel Norms I was introduced in 1988.
  • Basel Norms I focused almost entirely on credit risk.
  • Credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest.
  • 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.
  • For example, an asset-backed by collateral would carry lesser risks as compared to personal loans, which have no collateral.

Basel Norms II

Though India follows Basel II norms, they are yet to be fully implemented in India and overseas.

  1. BCBS published Basel II guidelines in 2004
  2. These were the refined and reformed versions of the Basel I accord.
  3. The guidelines were based on three parameters, which the committee calls pillars.
    • Market Discipline: This needs increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank.
    • Supervisory Review: According to this, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market and operational risks.
    • Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of 8% of risk assets

In the Indian context, the Reserve Bank of India (RBI) is overseeing the implementation of BASEL III Norms.

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