Basel II and Basel III Norms - All that you Need to Know

Today I am providing a useful write up on BASEL Accords, complying with the many requests from readers.


1. Brief History:

The Basel Committee on Banking Supervision – is an international banking regulatory committee formed to develop banking supervisory regulations. It was established by the Governors of the Central Banks of a group of 10 countries (initially) in 1974.

The objective of the BCBS is to gain a better understanding of the challenges faced by modern banking system in terms of risk and it risk management and to frame supervisory and regulatory standards and guidelines to help the banking system diminish these risks and function properly

  • India is a member of the BCBS along with Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, U.K. and USA.
  • The present Chairman of the BCBS is Stefan Ingves, who is the Governor of the central bank of Sweden.

2. Why needed in today’s banking sector?

The Global Economic Crisis (2007-08) showed us all how banking sector in the 21st C, though highly developed was still prone to the financial shocks. Also the spillover into the banking system from other sectors was also seen, and thus it was felt globally that, as far as banking system was concerned, unified and stricter norms should be welcomed.

3. BASEL II


The predecessor of BASEL III and successor of BASEL I, was in place during the global economic meltdown, and showed the shortcomings in the existing regulatory and supervisory framework.

The pillars of BASEL II are further down in the article.

4. BASEL III and why it had to come:

BASEL III which is formally known as the ‘3rd BASEL Accord’ – was released in December, 2010 after being ratified in November 2010 by G20 summit in Seoul – with a view to upgrade the existing norms, i.e., that of Basel II.


  • BASEL III is the result of the financial crisis of 2007-2008, which made the BCBS feel that a more stringent supervisory guidelines were required to prevent such mishaps from happening in the future; 
  • Its aim, among other things, is to strengthen the banking sector to be able to withstand such severe financial crisis without crumbling. 
  • According to BCBS "Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector".

 5. The Pillars of BASEL 2 and 3 for your comparison benefit!

BASEL III NORMS

BASEL III explained

5. Difference between BASELs II and III?

As you can see from the two images, the difference in the wordings in the three pillars…the word ‘enhanced’ has been added to the three pillars of BASEL III.

This simply means that supervisory/regulatory controls are now improved and better in BASEL III, than the previous Basel II.

The important Key elements of BASEL III and it’s difference from BASEL II can be understood as follows:

(i)
Capital and it’s stricter standards
: BASEL III requires overall capital to be 10.5 % of the Risk Weighted Assets (RWAs and important from exam/interview point of view!)

Where the BCBS recommends 10.5%, India has plans to achieve 11.5% of RWAs as the overall capital, including Tier I, Tier II and Common Tier Equity and Capital Conservation Buffer (CCB) at 2.5%

(ii) Capital conservation buffer (at 2.5%) has been introduced with the aim of ensuring that banks maintain a buffer (like a cushion or a  shock absorber) of capital – that can be utilized to withstand losses and financial and economic crises.

(iii) Counter-cyclical buffer (CCCB), ranging within 0 -2.5% - has been introduced in BASEL III, to achieve a broader and blanket goal of protecting the banking sector of excess credit growth – which directly means increase in risk in bank sector at such times.


6. Indian Scenario:

(i) As recently as October 2014, the RBI has revised Basel III liquidity guidelines to meet the liquidity coverage ratio (LCR) threshold of 60 % by January 2015.

(ii) Wholly implementation of BASEL III in India is marked for 31 March, 2019 (revised from 31.3.2018); while internationally it is 1 January, 2019.



I tried my best to concise the vast material available on BASEL just from exam point of view’s quick reading and important points.

I hope this is helpful.

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