From UPSC perspective, the following things are important :
Prelims level : Basel Norms: I, II and III
Mains level : Banking regulation in India
- The Basel Committee on Banking Supervision has said that India is compliant regarding regulation on large exposures though, in some respects, regulations are stricter than the Basel large-exposures framework.
Banking regulations in India are more stricter: Basel Accord
- In some other respects, the Indian regulations are stricter than the Basel large exposures framework.
- For example, banks’ exposures to global systemically important banks are subject to stricter limits in line with the letter and spirit of the Basel Guidelines.
- The scope of application of the Indian standards is wider than just the internationally active banks covered by the Basel framework.
What are Basel Norms?
- Basel is a city in Switzerland. It is the headquarters of Bureau of International Settlement (BIS), which fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
- Basel guidelines refer to broad supervisory standards formulated by this group of central banks – called the Basel Committee on Banking Supervision (BCBS).
- The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial system are called Basel accord.
- The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
- India has accepted Basel accords for the banking system.
- In 1988, BCBS introduced capital measurement system called Basel capital accord, also called as Basel 1.
- It focused almost entirely on credit risk. 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. India adopted Basel 1 guidelines in 1999.
- In June ’04, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord.
- The guidelines were based on three parameters, which the committee calls it as pillars:
- Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
- 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.
- Market Discipline: This need increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented.
- In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008.
- A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding.
- Also the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk.
- Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
- The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.