Frequently Asked Questions (FAQ) on Basel Norms
What is BIS ?
- BIS stands for Bureau of International Settlement.
- It boosts the co-operation between the Central Banks to achieve the common motto to gain financial stability and to maintain the common standard of rules and regulations regarding Banking.
- In the city Basel of Switzerland, the head quarter of BIS is situated.
- This oldest Global Financial Organization was established in 1930.
- It has two representative offices in Mexico City and Hong Kong.
- It has 60 member nations and 95% of the total GDP of world is covered by BIS.
What are Basel Norms?
- The Basel Norms are the set of agreement made by the Basel Committee of Banking Supervision (BCBS).
- Stefan Ingves is the Chairperson of BCBS.
- It focuses on the credit risk to the Banks mainly.
- The financial system is known as the Basel Accord.
- The accord checks whether the banks and other financial organizations have enough money to handle the unexpected loss and meet the monetary obligations.
- The Basel Accord has three Basel Norms i.e. Basel I, Basel II and Basel III.
- India has adopted the Basel Norms for Banking System.
What is CAR & CRAR ?
- CAR stands for Capital Adequacy Ratio.
- CRAR stands for Capital to Risk Weighted Asset Ratio.
What is the Formula of CAR?
- CAR = Total Capital / Risk Weighted Assets * 100 while Total Capital = Tier I Capital + Tier II Capital.
- Tier I Capital is known as the Core Capital including common shares.
- Tier II Capital is the Subordinate Capital i.e. Debts, Bonds.
Why Basel Norms are important?
- The Banking sector of the 21st century is prone to various unexpected financial crisis.
- To handle these shocks, stricter and unified norms are essential.
What is Credit Risk?
- If a borrower cannot repay the loan as per condition, the risk of financial loss is known as the Credit Risk.
- The borrowers are called as the Sub-Prime Borrowers.
What are the disadvantages of Basel I and Basel II Norms?
- Basel I Norms only depend on the Credit Risk, the Market and Operational Risk is not covered under it.
- The Basel II Norms provides incentive to the management of bank and ignores Credit Risk.
- The risk evaluation procedure under Basel II Norms is complex by nature.
What is the importance of Basel III Norms?
- The Basel III Norms, which was released in 2010, eliminated the disadvantages of Basel I and Basel II Norms.
- It is a result of the financial crisis of 2007-2008.
- The main aim of Basel III Norms is to strengthen banking sector to handle the financial crisis.
What are the advantages of Basel III Norms?
- Capital Requirements is minimum.
- Supervisory process of review.
- It provides market discipline and enhanced disclosure of risk.
What are main features of Basel III Norms over Basel II Norms?
- Basel III maintains strict standard of capital (10.5% of RWA).
- To handle the financial losses and economic crisis, Basel III Norms has introduced the “”Capital Conservation Buffer.
- The Basel III Norms has established a “Counter Cyclical Buffer” to protect the excessive growth of credit.
What is the need of introducing Basel III Norms in India?
- To connect with the rest parts of world.
- To handle the external financial shocks.
What are the problems that will arise in case of implementing Basel III Norms in India?
- Total capital of 2.4 Lakh Crore is needed to implement it.
- There would be an additional pressure to maintain the liquidity along with SLR.
- Upgraded technology and processes are essential for computing the capital requirements as per the revised standard.
What are the steps taken by the Indian Government to implement it successfully?
- Government has allowed the banks to raise the capital by accessing market and maintains a minimum share of 52%.
- A scheme has been launched by the Government to reduce the bad assets and increase the functioning of Banks.
- The Basel III Norms would be fully implemented in India from March of 2019.