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Weekly Banking Awareness Capsule 4
This is the second article in our series. In this article you will get, information about different topics of Banking Awareness in the form of Weekly Banking Awareness Capsule.
Banking Awareness section has become an essential section of majority of anking/recruitment examination conducted in India. Essentially it checks how much is the candidate keeping up with the knowledge of banking and financial sector,with special reference to the banking industry
In this article, we are providing ALL INFORMATION ABOUT THE BASEL NORMS
- The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters.
- Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.
- It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding.
- The Committee‟s Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland.
NEED FOR BASEL NORMS
- The first accord by the name Basel Accord I was established in 1988 and was implemented by 1992.
- It was the very first attempt to introduce the concept of minimum standards of capital adequacy.
- Then the second accord by the name Basel Accord II was established in 1999 with a final directive in 2003 for implementation by 2006 as Basel II Norms.
- Unfortunately, India could not fully implement this but, is now gearing up under the guidance from the Reserve Bank of India to implement it from 1 April, 2009.
- Basel II Norms have been introduced to overcome the drawbacks of Basel I Accord.
- For Indian Banks, its the need of the hour to buckle-up and practice banking business at par with global standards and make the banking system in India more reliable, transparent and safe.
- These Norms are necessary since India is and will witness increased capital flows from foreign countries and there is increasing cross-border economic & financial transactions.
FEATURES OF BASEL II NORMS
- Basel II Norms are considered as the reformed & refined form of Basel I Accord. The Basel II Norms primarily stress on 3 factors, viz. Capital Adequacy, Supervisory Review and Market discipline.
- The Basel Committee calls these factors as the Three Pillars to manage risks.
Pillar I: Capital Adequacy Requirements
- Under the Basel II Norms, banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
- For India, the Reserve Bank of India has mandated maintaining of 9% minimum capital
adequacy requirement. This requirement is popularly called as Capital Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR).
Pillar II: Supervisory Review
- Banks majorly encounter with 3 Risks, viz. Credit, Operational & Market Risks.
- Basel II Norms under this Pillar wants to ensure that not only banks have adequate capital to support all the risks, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks.
The process has four key principles:
- Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels.
- Supervisors should review and evaluate bank‟s internal capital adequacy assessment and
strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios.
- Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum.
- Supervisors should seek to intervene at an early stage to prevent capital from falling below minimum level and should require rapid remedial action if capital is not mentioned or restored.
Pillar III: Market Discipline
- Market discipline imposes banks to conduct their banking business in a safe, sound and effective manner.
- Mandatory disclosure requirements on capital, risk exposure (semiannually or more
frequently, if appropriate) are required to be made so that market participants can assess a bank‟s capital adequacy.
- Qualitative disclosures such as risk management objectives and policies, definitions etc. may be also published.
- The Reserve Bank released, guidelines outlining proposed implementation of Basel III capital regulation in India.
- These guidelines are in response to the comprehensive reform package entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” of the Basel Committee on Banking Supervision (BCBS) issued in December 2010.
The major highlights of the draft guidelines are:
Minimum Capital Requirements:
- Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets (RWAs).
- Tier 1 capital must be at least 7% of RWAs.
- Total capital must be at least 9% of RWAs.
Capital Conservation Buffer:
- The capital conservation buffer in the form of Common Equity of 2.5% of RWAs. A such minimum
- Capital Adequacy ratio for banks will be 11.5% after full application of the capital conservation buffer by 31 March 2018.
- Capital conservation buffer requirement is proposed to be implemented between March 31, 2014 and March 31, 2018.
- It is proposed that the implementation period of minimum capital requirements and deductions from Common Equity will begin from January 1, 2013 and be fully implemented as on March 31, 2018.
- The implementation schedule indicated above will be finalized taking into account the feedback received on these guidelines.
- Instruments which no longer qualify as regulatory capital instruments will be phased-out during the period beginning from January 1, 2013 to March 31, 2022.
Enhancing Risk Coverage
- For OTC derivatives, in addition to the capital charge for counterparty default risk under Current Exposure Method, banks will be required to compute an additional credit value adjustments (CVA) risk capital charge.
- The parallel run for the leverage ratio will be from January 1, 2013 to January 1, 2018, during which banks would be expected to strive to operate at a minimum Tier 1 leverage ratio of 5%.
- The leverage ratio requirement will be finalized taking into account the final proposal of the Basel Committee.
Friends this is it regarding Weekly Banking Awareness. We will update Weekly Banking Awareness Capsule like this every week.If you have any suggestion or query, kindly post it in the comments section.Also as per the demand from your side, you can also download it in the pdf format from below.
- Top 100 Current Affairs Capsule May 2016
- Weekly Current Affairs 2016 (30 May – 5 June)
- Weekly Current Affairs 2016 (6 June – 12 June)
- Weekly Current Affairs 2016 (13 June – 19 June)
- Weekly Current Affairs 2016 (20 June – 26 June)
- Banking Awareness Capsule 1
- Banking Awareness Capsule 2
- Banking Awareness Capsule 3
- Insurance Awareness Capsule 1
- Insurance Awareness Capsule 2
- Insurance Awareness Capsule 3
- General Knowledge Capsule 1
- General Knowledge Capsule 2
- General Knowledge Capsule 3
- General Knowledge Capsule 4
- Computer Knowledge Capsule 1
- Computer Knowledge Capsule 2
- Computer Knowledge Capsule 3
- English Booster Capsule 1
- English Booster Capsule 2