Details about BASEL III Norms

"BASEL NORMS"

For SBI PO-RRBs-IBPS PO/ Clerk

Introduction:

The BASEL Committee on Banking Supervision (BCBS) issued an extensive reform package entitled ‘BASEL III’: A global regulatory framework for more resilient banks and banking systems in December 2010.

Objectives:

• To reduce the risk of spillover from the financial sector to the real economy;
• To improve banking sector’s ability to absorb shocks arising from the financial and economic stress;

Scope:

• The banks are to comply with the capital adequacy ratio (CAR) requirements at 2 levels:
• The standalone (Solo) level CAR requirements;
• The consolidated (Group) level CAR requirements i.e. after consolidating the assets and liabilities of its subsidiaries, except those engaged in insurance and non-financial activities;

BASEL Committees Pillars:

The BASEL III framework is based on 3 components called 3 pillars, which include,

Pillar 1: Enhanced Minimum Capital & Liquidity requirements

Pillar 2: Enhanced Supervisory Review Process for Firm- Wide Risk Management and Capital Planning.

Pillar 3: Enhanced Risk Disclosure & Market Discipline.

Pillar 1 – Minimum Capital & Liquidity Standards:

• The total regulatory capital consists of the following:
• Tier 1 Capital (going-concern capital) comprising –
• Common Equity Tier 1 and
• Additional Tier 1
• Tier 2 Capital (gone-concern capital);
• In additional, the banks will also have to build capital conservation buffer (CCB), Comprised of common equity.

 Overall Capital (% to Risk Weighted assets):

		India ++	BCBS
1.	Min Total Capital Ratio  plus CCB [5+6]	11.5	1.05
2.	Min Common Equity Tier 1 (CET1) Ratio	5.5	4.5
3.	Tier 2 Capital Ratio	2.0	2.0
4.	Min CET 1Ratio +CCB [1+6]	8.0	7.0
5.	Additional Tier 1 Capital Ratio	1.5	1.5
6.	Min Total Capital Ratio (MTC) [3+4]	9.0	8.0
7.	Capital Conservation Buffer (CCB)	2.5	2.5

Pillar 2 – Supervisory Review Process:       

The objective is to ensure that banks have adequate capital to support the risk in their business. Supervisory Review and Evaluation Process (SREP) and Internal Capital Adequacy Assessment Process (ICAAP) are 2 important components of SRP. ICAAP comprises a bank’s procedures and measures. SREP consists of a review and evaluation process adapted by RBI, to review and evaluation ICAAP.

Pillar 3 – Risk Disclosure & Market Discipline:

The purpose of market discipline is to complement Pillar 1 and Pillar 2. It encourages market discipline by developing a set of disclosure requirements, which will allow market participants to assess key pieces of information on the scope of application, risk assessment processes, risk exposures and hence, the capital adequacy of the institution.

Capital Conservation Buffer (CCB):

CCB is designed to ensure that banks build up capital buffers during normal times (i.e. outside period of stress) which can be used if losses are incurred during a stressed period. Banks to create a capital conservation buffer (consisting of common equity) of 2.5% by 31^st March, 2018;