Basel norms for Banking: The Basel Committee was set in 1974 in the aftermath of irregularities in Banking and Currency Market by the group of ten countries. The committee was set up to enhance the financial stability of country particularly within banking system. The Committee was headquartered at the Banking for International Settlement in Basel (A city in Switzerland).
Aim for Banking for International Settlement (BIS): At the outset the aim of the committee was to close the gaps in supervisory system in place within international banking system.
- No Bank should be able to evade supervision
- Supervision should be adequate and consistent across members
- In 1988 Basel Committee on Banking supervision (BCBS) introduced first set of norms for Banking system also known as Basel
- Basel -1 norms were primarily focused on Credit Risk and Risk Weighted Assets with assets been classified into 5 categories
- Cash and Treasuries with high liquidity had Risk Weight of 0%
- Mortgage Backed Securities (Rating of AAA) been given weights of 20%
- Municipal Bonds and Residential Mortgages were given 50% weight
- Most of the Corporate Debt were given 100% weight
- Few types of assets were not given any rating
- Banks with an international presence are required to hold capital equal to 8% of their risk-weighted assets (RWA).
Basel 2: In 2004, Basel 2 guidelines were published by Basel Committee on Banking supervision (BCBS). Basel-2 norms were considered to be reformed version of Basel 1. Basel-2 was intended to amend international banking standards that controlled how much capital banks were required to hold to guard against the financial and operational risks banks face. These regulations aimed to ensure that the more significant the risk a bank is exposed to, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability
- Banks should maintain a minimum capital adequacy requirement of 8% of risk assets
- Banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that is credit and increased disclosure requirements
- The three types of risk are- operational risk, market risk, capital risk
- Banks need to mandatory disclose their risk exposure, etc. to the central bank
Basel 3: In 2010, Basel-3 norms were released in the aftermath of 2008 financial crisis. These accords deal with risk management aspects for the banking sector.
- Improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source
- Improve risk management and governance
- Strengthen banks’ transparency and disclosures