Basel accord refers to a set of agreements set up by Basel Committee on Bank Supervision (BCBS),
which provides recommendations on banking, regulations in regards to capital
risk, market risk and operational risk. The purpose of the accord is to ensure
that financial institutions have enough capital on account to meet obligations
and absorb unexpected losses.
The Basel Committee is named after the Swiss town of
Basel. The Basel Committee on Banking Supervision operates under the support of
the Bank of International Settlements
(BIS) located in Basel, Switzerland.
BASEL-1
Basel-1 is the round of deliberations by central bankers
from around the world, and in 1998, the BCBS published a set of minimal capital
requirements for banks.It is the first accord in the series of Basel norms. Basel-1
primarily focus on credit risk.
Assets of banks are classified and grouped in five categories according to
credit risk, carrying risk weights of zero, ten, twenty, fifty, and up to one
hundred percent. Banks with international presence are required to hold capital
equal to 8 per cent of the
risk-weighted assets. It was
enforced by law in the Group of Ten (G-10) countries in 1992 but
Japan banks permitted an extended transition period.
BASEL-2
It is the second of the Basel Accords. It is published in
the year 2004.Basel 1 is now widely viewed outdated because it mainly focused
on capital requirements for banks. The Basel-2 adds supervision and market
discipline to these capital requirements through the 3 pillar concepts. The other two pillars have been added in Basel 2
as reinforcement to the first pillar. The three pillars are: minimum capital requirement, supervisory
review and market discipline.
·
The first pillar is on capital requirement,
wherein, it identified three different types of risk: credit risk, operational
risk and market risk.
·
Supervisory process focuses on the bank’s
internal processes and systems.
Market discipline focuses on market
disclosures being made by the bank which will allow the market participants to
gauge the capital adequacy of an institution. The aim of Pillar 3 is to allow
market discipline to operate by requiring institutions to disclose details on
the scope of application, capital, risk exposures, risk assessment processes,
and the capital adequacy of the institution.
Basel-2 is still not fully implemented in India and many
countries.
BASEL-3
Basel iii is an enhancement over Basel ii brought out
with the experience of global financial meltdown. Basel III is part of the continuous effort made by
the Basel Committee on Banking Supervision to enhance the banking regulatory
framework. It builds on the Basel I and Basel II documents, and seeks to
improve the banking sector's ability to deal with financial and economic
stress, improve risk management and strengthen the banks' transparency. A focus
of Basel III is to foster greater resilience at the individual bank level in
order to reduce the risk of system wide shocks. The guidelines for Basel-3 were
published in the year 2010.
Enhancements of Basel
iii over Basel ii
·
Augmentation in the level and quality of
Capital
·
Introduction of liquidity standards
·
More comprehensive disclosures
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