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The Bank for International Settlements (BIS) is an international organization of central

banks which "fosters international monetary and financial cooperation and serves as a bank for
central banks. As an international institution, it is not accountable to any single national
The Bank for International Settlements was established in 1930. It is the world's oldest
international financial institution and remains the principal Centre for international central
bank cooperation.
The BIS was established in the context of the Young Plan (1930), which dealt with the issue of
the reparation payments imposed on Germany by the Treaty of Versailles following the First
World War. The new bank was to take over the functions previously performed by the Agent
General for Reparations in Berlin: collection, administration and distribution of the annuities
payable as reparations. The Bank's name is derived from this original role. The BIS was also
created to act as a trustee for the Dawes and Young Loans (international loans issued to
finance reparations) and to promote central bank cooperation in general.
The reparations issue quickly faded, focusing the Bank's activities entirely on cooperation
among central banks and, increasingly, other agencies in pursuit of monetary and financial
The BIS carries out its work through subcommittees, the secretariats it hosts and through an
annual general meeting of all member banks. It also provides banking services, but only to
central banks and other international organizations. It is based in Basel, Switzerland, with
representative offices in Hong Kong and Mexico City.
As an organization of central banks, the BIS seek to make monetary policy more predictable
and transparent among its 58 member central banks. While monetary policy is determined by
each sovereign nation, it is subject to central and private banking scrutiny and potentially to
speculation that affects foreign exchange rates and especially the fate of export economies.
Failures to keep monetary policy in line with reality and make monetary reforms in time,
preferably as a simultaneous policy among all 58 member banks and also involving

the International Monetary Fund, have historically led to losses in the billions as banks try to
maintain a policy using open market methods that have proven to be based on unrealistic
Central banks do not unilaterally "set" rates, rather they set goals and intervene using their
massive financial resources and regulatory powers to achieve monetary targets they set. One
reason to coordinate policy closely is to ensure that this does not become too expensive and
that opportunities for private arbitrage exploiting shifts in policy or difference in policy, are
rare and quickly removed.
Two aspects of monetary policy have proven to be particularly sensitive, and the BIS therefore
have two specific goals: to regulate capital adequacy and make reserve
requirements transparent.

About BIS:
The mission of the Bank for International Settlements (BIS) is to serve central banks in their
pursuit of monetary and financial stability, to foster international cooperation in those areas
and to act as a bank for central banks.
In broad outline, the BIS pursue its mission by:

promoting discussion and facilitating collaboration among central banks;

supporting dialogue with other authorities that are responsible for promoting financial

conducting research on policy issues confronting central banks and financial

supervisory authorities;

acting as a prime counterparty for central banks in their financial transactions; and

Serving as an agent or trustee in connection with international financial operations.

The head office is in Basel, Switzerland and there are two representative offices: in the Hong
Kong Special Administrative Region of the People's Republic of China and in Mexico City.
Established on 17 May 1930, the BIS is the world's oldest international financial
As its customers are central banks and international organizations, the BIS do not accept
deposits from, or provide financial services to, private individuals or corporate entities. The
BIS strongly advises caution against fraudulent schemes.

Organization and governance:

The BIS's people

The BIS currently employs 647 staff from 54 countries.

All members of staff are required to behave in accordance with general principles laid
down in the staff code of conduct. The BIS Compliance Charter describes the guiding
principles for managing compliance at the Bank.

Governance structures

The governance of the Bank is determined by its Statutes, which were last revised
in June 2005 following a review of the governance of the Bank by three leading
independent legal experts.

The three most important decision-making bodies within the Bank are:

The General Meeting of member central banks

The Board of Directors

The Management of the Bank

Decisions taken at each of these levels concern the running of the Bank and as such are
mainly of an administrative and financial nature, related to its banking operations, the
policies governing internal management of the BIS and the allocation of budgetary resources
to the different business areas.
The Bank's administrative and budgetary rules apply to the committees hosted by the BIS.
Other aspects of the committees' governance are the responsibility of the body to which each

Member central banks:

Members are the central banks or monetary authorities of:

Algeria, Argentina, Australia, Austria, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria,
Canada, Chile, China, Colombia, Croatia, the Czech Republic, Denmark, Estonia, Finland,
France, Germany, Greece, Hong Kong SAR, Hungary, Iceland, India, Indonesia, Ireland,
Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Macedonia (FYR), Malaysia,
Mexico, the Netherlands, New Zealand, Norway, Peru, the Philippines, Poland, Portugal,
Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain,
Sweden, Switzerland, Thailand, Turkey, the United Arab Emirates, the United Kingdom and
the United States, plus the European Central Bank.

Banking services for central banks

The BIS offers a wide range of financial services to assist central banks and other official
monetary institutions in the management of their foreign reserves. Some 140 customers,
including various international financial institutions, currently make use of these services.
BIS financial services are provided out of two linked trading rooms: one at its Basel head
office and one at its office in Hong Kong SAR.

The Changing Role Of The BIS:

Since 1930, central bank cooperation at the BIS has taken place through the regular
meetings in Basel of central bank Governors and experts from central banks and other
agencies. In support of this cooperation, the Bank has developed its own research in
financial and monetary economics and makes an important contribution to the
collection, compilation and dissemination of economic and financial statistics.

Apart from fostering monetary policy cooperation, the BIS has always performed
"traditional" banking functions for the central bank community (e.g. gold and foreign
exchange transactions), as well as trustee and agency functions. The BIS was the
agent for the European Payments Union (EPU, 1950-58), helping the European
currencies restore convertibility after the Second World War. Similarly, the BIS have
acted as the agent for various European exchange rate arrangements, including the
European Monetary System (EMS, 1979-94) which preceded the move to a single

Organization of central banks:

As an organization of central banks, the BIS seek to make monetary policy more
predictable and transparent among its 60 member central banks, except in the case of
Eurozone countries which forfeited the right to conduct monetary policy in order to
implement the euro. While monetary policy is determined by most sovereign nations, it
is subject to central and private banking scrutiny and potentially to speculation that
affects foreign exchange rates and especially the fate of export economies. Failures to
keep monetary policy in line with reality and make monetary reforms in time,
preferably as a simultaneous policy among all 60 member banks and also involving the
International Monetary Fund, have historically led to losses in the billions as banks try
to maintain a policy using open market methods that have proven to be based on
unrealistic assumptions.

Central banks do not unilaterally "set" rates, rather they set goals and intervene using
their massive financial resources and regulatory powers to achieve monetary targets
they set. One reason to coordinate policy closely is to ensure that this does not become
too expensive and that opportunities for private arbitrage exploiting shifts in policy or
difference in policy are rare and quickly removed.
Two aspects of monetary policy have proven to be particularly sensitive, and the BIS
therefore have two specific goals: to regulate capital adequacy and make reserve
requirements transparent.
Regulates capital adequacy
Capital adequacy policy applies to equity and capital assets. These can be overvalued
in many circumstances because they do not always reflect current market conditions or
adequately assess the risk of every trading position. Accordingly the BIS requires the

capital/asset ratio of central banks to be above a prescribed minimum international

standard, for the protection of all central banks involved.
The BIS's main role is in setting capital adequacy requirements. From an international
point of view, ensuring capital adequacy is the most important problem between
central banks, as speculative lending based on inadequate underlying capital and
widely varying liability rules causes economic crises as "bad money drives out good"
(Gresham's Law).
Encourages reserve transparency
Reserve policy is also important, especially to consumers and the domestic economy.
To ensure liquidity and limit liability to the larger economy, banks cannot create
money in specific industries or regions without limit. To make bank depositing and
borrowing safer for customers and reduce risk of bank runs, banks are required to set
aside or "reserve".
Reserve policy is harder to standardize as it depends on local conditions and is often
fine-tuned to make industry-specific or region-specific changes, especially within large
developing nations. For instance, the People's Bank of China requires urban banks to
hold 7% reserves while letting rural banks continue to hold only 6%, and
simultaneously telling all banks that reserve requirements on certain overheated
industries would rise sharply or penalties would be laid if investments in them did not
stop completely. The PBoC is thus unusual in acting as a national bank, focused on the
country not on the currency, but its desire to control asset inflation is increasingly
shared among BIS members who fear "bubbles", and among exporting countries that
find it difficult to manage the diverse requirements of the domestic economy,
especially rural agriculture, and an export economy, especially in manufactured goods.
Effectively, the PBoC sets different reserve levels for domestic and export styles of
development. Historically, the United States also did this, by dividing federal monetary
management into nine regions, in which the less-developed western United States had
looser policies.
For various reasons it has become quite difficult to accurately assess reserves on more
than simple loan instruments, and this plus the regional differences has tended to
discourage standardizing any reserve rules at the global BIS scale. Historically, the BIS
did set some standards which favoured lending money to private landowners (at about
5 to 1) and for-profit corporations (at about 2 to 1) over loans to individuals. These
distinctions reflecting classical economics were superseded by policies relying on
undifferentiated market valuesmore in line with neoclassical economics.
Goal: a financial safety net
The relatively narrow role the BIS plays today does not reflect its ambitions or
historical role.
A "well-designed financial safety net, supported by strong prudential regulation and
supervision, effective laws that are enforced, and sound accounting and disclosure
regimes", are among the Bank's goals. In fact they have been in its mandate since its
founding in 1930 as a means to enforce the Treaty of Versailles.
The BIS has historically had less power to enforce this "safety net" than it deems
necessary. Recent head Andrew Crockett has bemoaned its inability to "hardwire the
credit culture", despite many specific attempts to address specific concerns such as the

growth of offshore financial centres (OFCs), highly leveraged institutions (HLIs), large
and complex financial institutions (LCFIs), deposit insurance, and especially the
spread of money laundering and accounting scandals.

Role in banking supervision:

The BIS provides the Basel Committee on Banking Supervision with its 17-member
secretariat, and with it has played a central role in establishing the Basel Capital
Accords of 1988 and 2004. There remain significant differences between United
States, European Union, and United Nations officials regarding the degree of capital
adequacy and reserve controls that global banking now requires. Put extremely
simply, the United States, as of 2006, favored strong strict central controls in the
spirit of the original 1988 accords, while the EU was more inclined to a distributed
system managed collectively with a committee able to approve some exceptions.
The UN agencies, especially ICLEI, are firmly committed to fundamental risk
measures: the so-called triple bottom line and were becoming critical of central
banking as an institutional structure for ignoring fundamental risks in favour of
technical risk management.


The breakdown of the Bretton Woods system of managed exchange rates in 1973
soon led to casualties. On 26 June 1974, West Germanys Federal Banking
Supervisory Office withdrew Bankhaus Herstatts banking license after finding that
the banks foreign exchange exposures amounted to three times its capital. Banks
outside Germany took heavy losses on their unsettled trades with Herstatt, adding an
international dimension to the debacle.
In October the same year, the Franklin National Bank of New York also closed its
doors after racking up huge foreign exchange losses. Three months later, in response
to these and other disruptions in the international financial markets, the central bank
governors of the G10 countries established a Committee on Banking Regulations and
Supervisory Practices.
Later renamed as the Basel Committee on Banking Supervision, the Committee
was designed as a forum for regular cooperation between its member countries on
banking supervisory matters. Its aim was and is to enhance financial stability by
improving supervisory knowhow and the quality of banking supervision worldwide.
The Committee seeks to achieve its aims by setting minimum supervisory
standards; by improving the effectiveness of techniques for supervising
international banking business; and by exchanging information on national
supervisory arrangements. And, to engage with the challenges presented by diversified
financial conglomerates, the Committee also works with other standard-setting bodies,
including those of the securities and insurance industries
Since the first meeting in February 1975, meetings have been held regularly three or
four times a year. After starting life as a G10 body, the Committee expanded its
membership in 2009 and now includes 27 jurisdictions. The Committee now reports
to an oversight body, the Group of Central Bank Governors and Heads of Supervision
(GHOS), which comprises central bank governors and (non-central bank) heads of
supervision from member countries.
Countries are represented on the Committee by their central bank and also by the
authority with formal responsibility for the prudential supervision of banking business
where this is not the central bank. The present Chairman of the Committee is Stefan
Ingves, Governor of the Riksbank, Swedens central bank.
The Committees decisions have no legal force. Rather, the Committee formulates
supervisory standards and guidelines and recommends statements of best practice in the

expectation that individual national authorities will implement them. In this way, the
Committee encourages convergence towards common standards and monitors their
implementation, but without attempting detailed harmonization of member countries
supervisory approaches. At the outset, one important aim of the Committees work was to
close gaps in international supervisory coverage so that
No foreign banking establishment would escape supervision; and
That supervision would be adequate and consistent across member jurisdictions. A first
step in this direction was the paper issued in 1975 that came to be known as the
Concordat, which set out principles by which supervisory responsibility should be
shared for banks foreign branches, subsidiaries and joint ventures between host and
parent (or home) supervisory authorities. In May 1983, the Concordat was revised and reissued as Principles for the supervision of banks foreign establishments.
In April 1990, a supplement to the 1983 Concordat was issued with the aim of
improving the cross-border flow of prudential information between banking supervisors.
In June 1992, certain principles of the Concordat were reformulated as minimum
standards. These standards were communicated to other banking supervisory
authorities, who were invited to endorse them and published in July 1992.In October
1996, the Committee released a report on The supervision of cross-border banking, drawn
up by a joint working group that included supervisors from non-G10 jurisdictions and
offshore centers. The document presented proposals for overcoming the impediments to
effective consolidated supervision of the cross-border operations of international banks.
Subsequently endorsed by supervisors from 140 countries, the report helped to forge
relationships between supervisors in home and host countries. The involvement of nonG10 supervisors also played a vital part in the formulation of the Committees Core
principles for effective banking supervision in the following year. The impetus for this
document came from a 1996 report by the G7 finance ministers that had called for
effective supervision in all important financial marketplaces, including those of emerging
In its June 1999 Consultative Paper, the Committee outlined its objectives in developing a
comprehensive approach to capital adequacy. As the Committee continues to refine the
new framework, it maintains the belief that:
The Accord should continue to promote safety and soundness in the financial System
and, as such, the new framework should at least maintain the current overall level of
capital in the system;
The Accord should continue to enhance competitive equality;
The Accord should constitute a more comprehensive approach to addressing risks;
The Accord should contain approaches to capital adequacy that are appropriately
sensitive to the degree of risk involved in a banks positions and activities;
The Accord should focus on internationally active banks, although its underlying
principles should be suitable for application to banks of varying levels of complexity
and sophistication.


From 1965 to 1981 there were about eight bank failures (or bankruptcies) in the
United States. Bank failures were particularly prominent during the '80s, a time which is
usually referred to as the "savings and loan crisis." Banks throughout the world were
lending extensively, while countries' external indebtedness was growing at an
unsustainable rate. As a result, the potential for the bankruptcy of the major international
banks because grew as a result of low security. In order to prevent this risk, the Basel
Committee on Banking Supervision, comprised of central banks and supervisory
authorities of 10 countries, met in 1987 in Basel, Switzerland.
The committee drafted a first document to set up an international 'minimum'
amount of capital that banks should hold. This minimum is a percentage of the total
capital of a bank, which is also called the minimum risk-based capital adequacy. In 1988,
the Basel I Capital Accord (agreement) was created. The Basel II Capital Accord follows
as an extension of the former, and was implemented in 2007. In this article, we'll take a
look at Basel I and how it impacted the banking industry.

The Purpose of Basel I:

In 1988, the Basel I Capital Accord was created. The general purpose was to:
1. Strengthen the stability of international banking system.
2. The basic achievement of Basel I have been to define bank capital and the so-called
bank capital ratio. In order to set up a minimum risk-based capital adequacy applying
to all banks and governments in the world, a general definition of capital was
required. Indeed, before this international agreement, there was no single definition of
bank capital. The first step of the agreement was thus to define it.
Two-Tiered Capital :
Basil I defines capital based on two tiers:
1. Tier 1 (Core Capital):

Tier 1 capital includes stock issues (or shareholders equity) and declared reserves,
such as loan loss reserves set aside to cushion future losses or for smoothing out income

2. Tier 2 (Supplementary Capital):

Tier 2 capital includes all other capital such as gains on investment assets, long-term
debt with maturity greater than five years and hidden reserves (i.e. excess allowance for
losses on loans and leases). However, short-term unsecured debts (or debts without
guarantees), are not included in the definition of capital.
Credit Risk is defined as the risk weighted asset (RWA) of the bank, which are
banks assets weighted in relation to their relative credit risk levels. According to Basel
I, the total capital should represent at least 8% of the bank's credit risk (RWA).


By the late 1990s, banks had become much more sophisticated in their operations
and risk management and were increasingly able to find ways to reduce a bank's risk
weighted assets in ways that did not reflect lower real risk (what has become known as

regulatory capital arbitrage). It was therefore decided that a new capital standard was
required and work began on Basel II.
Basel II is the second of the Basel Accords, (now extended and effectively
superseded by Basel III), which are recommendations on banking laws and regulations
issued by the Basel Committee on Banking Supervision. Basel II, initially published in
June 2004, was intended to create an international standard for banking regulators to
control how much capital banks need to put aside to guard against the types of financial
and operational risks banks (and the whole economy) face. One focus was to maintain
sufficient consistency of regulations so that this does not become a source of competitive
inequality amongst internationally active banks. Advocates of Basel II believed that such
an international standard could help protect the international financial system from the
types of problems that might arise should a major bank or a series of banks collapse. In
theory, Basel II attempted to accomplish this by setting up risk and capital management
requirements designed to ensure that a bank has adequate capital for the risk the bank
exposes itself to through its lending and investment practices. Generally speaking, these
rules mean that the greater risk to which the bank is exposed, the greater the amount of
capital the bank needs to hold to safeguard its solvency and overall economic stability.
Politically, it was difficult to implement Basel II in the regulatory environment
prior to 2008, and progress was generally slow until that year's major banking crisis
caused mostly by credit default swaps, mortgage-backed security markets and
similar derivatives.

Structure of Basel II:

Basel II consists of 3 'pillars' which enshrine the key principles of the new regime.
Collectively, they go well beyond the mechanistic calculation of minimum capital levels
set by Basel I, allowing lenders to use their own models to calculate regulatory capital
while seeking to ensure that lenders establish a culture with risk management at the heart
of the organization up to the highest managerial level. Basel II uses a "three pillars"
concept (1) minimum capital requirements (addressing risk), (2) supervisory review and
(3) market discipline.

The Basel I accord dealt with only parts of each of these pillars. For example: with
respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple
manner while market risk was an afterthought; operational risk was not dealt with at all.

The first pillar (Minimum Capital Requirement)

The first pillar deals with maintenance of regulatory capital calculated for three
major components of risk that a bank faces: credit, operational risk, and market risk. Other
risks are not considered fully quantifiable at this stage.

The Second Pillar (Supervisory Review)

Pillar 2 is meant to identify risk factors not captured in Pillar 1, giving regulators
discretion to adjust the regulatory capital requirement against that calculated under Pillar
1. For most lenders, the Pillar 2 process results in a higher regulatory capital requirement
than calculated under Pillar 1 alone. Pillar 2 requires banks to think about the whole
spectrum of risks they might face including those not captured at all in Pillar 1. It
provides a framework for dealing with systemic risk, pension risk, concentration
risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord
combines under the title of residual risk. Banks can review their risk management system.

The Third Pillar (Market Discipline)

Pillar 3 is designed to increase the transparency of lenders' risk profile by requiring them
to give details of their risk management and risk distributions. This pillar aims to
complement the minimum capital requirements and supervisory review process by
developing a set of disclosure requirements which will allow the market participants to
gauge the capital adequacy of an institution.
Market discipline supplements regulation as sharing of information facilitates assessment
of the bank by others, including investors, analysts, customers, other banks, and rating
agencies, which leads to good corporate governance. 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. It must be consistent with how the senior management, including the
board, assess and manage the risks of the institution.
When market participants have a sufficient understanding of a bank's activities and the
controls it has in place to manage its exposures, they are better able to distinguish
between banking organizations so that they can reward those that manage their risks
prudently and penalize those that do not.
These disclosures are required to be made at least twice a year, except qualitative
disclosures providing a summary of the general risk management objectives and policies
which can be made annually. Institutions are also required to create a formal policy on
what will be disclosed and controls around them along with the validation and frequency
of these disclosures.

Implementation Of Basel Accord II In India

In India, Reserve Bank of India has implemented the Basel II standardized norms on
31 March 2009 and banks are mandated to use Standardized Approach for credit risk and
Basic Indicator Approach for operational risk.
Existing RBI norms for banks in India (on September 2010): Common equity (including
of buffer): 3.6% (Buffer Basel 2 requirement requirements are zero.); Tier 1 requirement:
6%. Total Capital: 9% of risk weighted assets.
According to the draft guidelines published by RBI the capital ratios are set to
become: Common Equity as 5% + 2.5% (Capital Conservation Buffer) + 02.5%
(Counter Cyclical Buffer), 7% of Tier 1 capital and minimum capital adequacy ratio
(excluding Capital Conservation Buffer) of 9% of Risk Weighted Assets. Thus the actual
capital requirement is between 11 and 13.5% (including Capital Conservation Buffer and
Counter Cyclical Buffer)
In summary, Basel II aims not only to align regulatory capital more closely with risk
but to promote a more sophisticated approach to risk management and to create a 'risk
culture' inside lenders, whereby the organization, and senior management in particular,
understand risk and remain alert to risk as a core issue.


Basel III (or the Third Basel Accord) is a global, voluntary regulatory standard on
bank capital adequacy, stress testing and market liquidity risk. It was agreed upon by the
members of the Basel Committee on Banking Supervision in 201011, and was
scheduled to be introduced from 2013 and to be implemented until 2019. Basel III was
developed in response to the deficiencies in financial regulation revealed by the 2008
financial crisis. Basel III is supposed to strengthen banking system by improving quality
of banks capital, banks liquidity and banks leverage.
Basel III



Basel III


Systemic Risks &


Objectives of Basel III

According to BCBS the main two objectives of Basel III are:

To strengthen global capital and liquidity regulations with goal of promoting more
resilient banking sector


To improve banking sectors ability to withstand shocks arising from financial or

economic stress, which would reduce risk of spillover of financial sector to real

Based on the above mentioned objectives the Basel IIIs recommendations are divided
into three parts:

Capital Includes quality and quantity of capital, risk weightage to assets, leverage
ratio, capital conservation buffer, counter-cyclical buffer
Liquidity Short term & long term ratios
Other elements pertaining to overall stability of financial system.



As per RBI

Minimum Ratio of Total Capital To RWAs


Minimum Ratio of Common Equity to RWAs


Additional Tier 1 Capital

Minimum Tier I capital to RWAs
Maximum Tier 2 Capital
(within Total Capital)
Capital Conservation Buffer comprised of common
equity to RWAs (CCB)
Minimum Common Equity Tier 1 ratio plus capital
conservation buffer to RWAs
Minimum Total Capital + CCB



Capital Requirement:
The average Tier 1 capital ratio of Indian banks is around 10 per cent with more than
85% of it comprising common equity. The regulatory adjustments will reduce the available
equity capital only marginally. Hence the task of raising capital will not be so onerous for
Indian Banks.
As quoted by RBI former Governor D. Subbarao in September Indian banks would
require an additional capital of Rs.5 trillion to meet the new global banking norms. Of the
total Rs.5 trillion, equity capital will be Rs.1.75 trillion, while Rs.3.25 trillion will have to

come as the non-equity portion. This capital can be raised through markets and through
Government (in PSBs)
Also under Basel III, the trading book exposures, especially those having credit risk
and Resecuritizations exposures in both banking and trading book attract enhanced capital
charges. The CVA for OTC derivatives will also attract additional capital. Since the trading
book and OTC derivative portfolios of Indian banks are very small and they do not have any
exposures to re-securitized instruments, impact of these changes in capital regulation on their
balance sheets is insignificant.
Leverage Ratios
RBI already had Statuary Liquidity Ratio (SLR), as a regulatory mandate. The statutory
liquidity portfolio of Indian banks is constituted only for moderate risk i.e. Market Risk and it
is excluded from leverage ratio. The tier I capital of many Indian banks is comfortable (more
than 8% as per Basel II regulation of Tier I capital) and their derivatives activities are not
very large. So leverage ratio will not be a binding constraint for Indian Banks.
Liquidity Ratio
The major challenge for banks in implementing the liquidity standards is to develop
the capability to collect the relevant data accurately and to formulate them for identifying the
stress scenario with accuracy. However positive side for Indian banks, they have a substantial
amount of liquid assets which will enable them to meet requirements of Basel III.
In India, banks are statutorily required to hold minimum reserves of high-quality liquid
assets. Currently, such reserves (statutory liquidity ratio SLR) are required to be maintained
at a minimum of 24 per cent of net demand and time liabilities. Since these reserves are part
of the minimum statutory requirement, the Reserve Bank faces a dilemma whether and how
much of these reserves can be allowed to be reckoned towards the LCR. If these reserves are
not reckoned towards the LCR and banks are to meet the entire LCR with additional liquid
assets, the proportion of liquid assets in total assets of banks will increase substantially,
thereby lowering their income significantly. Thus the Reserve Bank is examining to what
extent the SLR requirements could be reckoned towards the liquidity requirement under
Basel III.

The Basel I Capital Accord aimed to assess capital in relation to credit risk, or the risk
that a loss will occur if a party does not fulfil its obligations. It launched the trend toward
increasing risk modelling research; however, its over-simplified calculations, and
classifications have simultaneously called for its disappearance, paving the way for the
Basel II Capital Accord and further agreements as the symbol of the continuous refinement
of risk and capital. Nevertheless, Basel I, as the first international instrument assessing the

importance of risk in relation to capital, will remain a milestone in the finance and banking
Given the current environment, the RBI has extended the final date for Basel-III to 2018.
This is positive as PSB's will get more time for
preparation. Moreover, capital
deduction now starts at 20% against 40% stipulated earlier. This move is encouraging and
should ensure smoother migration to the new framework. The RBI wants to implement
the recommendations of the 'Basel Committee on Banking Supervision to make the
financial system safe. It is aimed at protecting the depositors and to prevent a 2008-like
crises. Moreover, the 'perception' of a lower standard regulatory regime will put Indian
banks at a disadvantage in global competition. RBI is currently working on operational
aspects of implementation of the Countercyclical Capital Buffer. Besides, certain other
proposals viz. 'Definition of Capital Disclosure Requirements', 'Capitalization of
Bank Exposures to Central Counterparties' etc., are also engaging the attention of the Basel
Committee at present. Therefore, as per RBI, the final proposals of the Basel Committee on
these aspects will be considered for implementation, to the extent applicable, in future.
Further, for the financial year ending March 31, 2013, banks will have to disclose the
capital ratios computed under the existing guidelines (Basel II) on capital adequacy as
well as those computed under the Basel III capital adequacy framework. India's
struggling banking sector will face a period of lower profitability as it seeks to raise at least
Rs. 5000 billion in extra capital to meet the new Basel-III.
Both internationally and in India bankers have expressed their concerns over the
additional capital requirements under Basel III. It is feared that these additional capital
requirements, leverage ratios would hurt profitability of the bank. But studies have shown
that though the Basel III guidelines would impose short term costs on the banks in the long
term it would strengthen the financial system and make the banks more resilient against
stress. Also investors would appreciate the fact that though the returns have lowered the
risk has also reduced.
In India Basel III would make our banks compliant with global regulations, this would
help the Indian banks who wish to expand overseas. Also through Basel III would
strengthen the financial system. Capital requirements under Basel III may cause some
smaller banks to merge with the larger banks leading to consolidation of banks. In the
initial stages Basel III will require banks to incur expenditure on both capital as well as IT
infrastructure for accurate risk measurement. But adoption of a more risk sensitive
approach will increase the profitability of the banks in the long run. Also as the banks will
be perceived to be more stable and thus less risky the cost of capital will also decrease in
Now apart from raising capital the other challenges ahead of the banks are improving
their operational efficiency to decrease their NIM margins. Also reducing their NPA levels
in the current macroeconomic scenario will be a major challenge for the banks.