Frequently Asked Questions on Basel Norms

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.