Basel-III norms

• It has been made mandatory for the banks to abide by the Basel-III regulatory norms by March 2019.
• Government is planning to extend the deadline of its implementation date from 2019.

About Basel norms:

• After economic crisis in 1973, World economy was going through tough Phase. In response to these and other disruptions in the international financial markets, the central bank governors of the G10 countries established a Committee on Banking Regulations and Supervisory Practices at the end of 1974 which is latterly renamed as Basel Committee on Banking Supervision..
• The Committee’s decisions have no legal force. The Committee formulates minimum standards for the banking regulation and supervision of banks and expects individual countries to implement them with their own way. There are three reports are released by Basel committee as: Basel - I, Basel - II and Basel – III.

Basel – I:

• Also referred as: “The International Convergence of Capital Measurements and Capital Standards “. Under Basel - I, a capital measurement system commonly referred to as the Basel Capital Accord (1988 Accord) was approved by the G10 Governors and released to banks in July 1988 .
• This Capital Accord called for minimum Capital Adequacy Ratio to 8%.
• Capital Adequacy Ratio (CAR) = Total capital (Tier I + Tier II)/ Total Risk Weighted Assets
• According to RBI, CAR should be more than 9%.

Basel – II:
In response to the banking crises of the 1990s and the aforementioned criticisms of Basel - I, the Basel Committee decided in 1999 to propose a new, more comprehensive capital adequacy accord.
This accord, known formally as A Revised Framework on International Convergence of Capital Measurement and Capital Standards and informally as “Basel II”.
There are three pillars of Base –II:

• Minimum capital reserve requirements for the credit risk , market risk and operational risk
• Regulator-bank interaction, extending the rights of the regulator in bank supervision and dissolution
• Increase market discipline within a country’s banking sector

Basel - III:

• Basel - III guidelines released in 2010.
• RBI set the time period for implementing Base – III from 1 April 2013 to 31st March 2019.
• Basel III added a recommendation for banks to maintain an amount of tier 1 capital equal to at least 6% of total risk-weighted assets and maintain a total capital adequacy ratio of 10.5%.
• Capital Conservation Buffer: Banks will be required to hold a capital conservation buffer of 2.5%. The aim of asking to build conservation buffer is to ensure that banks maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress.
• Leverage Ratio: A leverage ratio is the relative amount of capital to total assets (not risk-weighted). This aims to put a cap on swelling of leverage in the banking sector on a global basis. 3% leverage ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in January 2018.

By: Vishal