BASEL COMMITTEE NORMS AND BANKING SECTOR REFORMS

AN OVERVIEW

Ramisha.K.C
Research Scholar
P.G. & Research Department of commerce,
St.Peters College, Kolenchery, Kerala

Introduction
The banking system plays a major role in every economy; mainly because it
has to ensure the optimal allocation of scarce capital resources by
effectively channelizing collected money from depositors to individuals,
businesses and governments in order to finance investments promising the
highest returns. Most of the nations capital is managed by banks mainly
because depositors entrust them the majority of their financial savings. That
is why any deficiency in the banking system may cause serious damages to
the performance of the economy. The dependence of the social and
economic welfare to the vital services of the banking and financial system
necessitates the existence of rigorous banking regulation. The importance
of the role of banks in both maintaining economic growth and enormously
contributing in economic collapses, prompted the Basel Committee to focus
on adequately regulating the banking sector and forcing banks of the
member countries to apply its capital standards. The present paper is an
attempt to analyses the Basel committee norms on banking supervision by
giving a special focus on Basel III norms on capital adequacy.

Statement of the problem

The Basel Committee is still
observing the dynamics of the framework
and continues to monitor and assess the
impact of this framework on a semiannual
basis to introduce the necessary
amendments. Nevertheless, the current
Basel III capital requirements are quite
interesting to analyze and discuss their
impact on the financial sector and the
real economy.

Objectives

Following are the important objectives of the study:

To analyse the various Basel committee norms on capital
adequacy.
To make a comparison between Basel II and Basel III accord on
capital adequacy.
To check the implementation of Basel committee norms in Indian
banking sector.
Methodology
The secondary data are used for the study. The data is collected
from the official publications of RBI, various journals and websites.

Requirements
Minimum Ratio

of

Total

Capital To RWAs
Minimum Ratio of Common

Under Basel II

Under Basel III

8%

10.50%

2%
Equity to RWAs
Tier I capital to RWAs
4%
Core Tier I capital to RWAs 2%
Capital
Conservation
None
Buffers to RWAs
Leverage Ratio
None
Countercyclical Buffer
None
Minimum
Liquidity
None
Coverage Ratio
Minimum
Net
Stable
None
Funding Ratio
Systemically
important

4.50% to 7.00%

Financial

TBD (2011)

Charge

Institutions None

6.00%
5.00%
2.50%
3.00%
0% to 2.50%
TBD (2015)
TBD (2018)

Analysis
Basel I
Basel Committee published a set of minimum capital requirements
for banks. According to Basel accord I risk-based capital adequacy
norms which is an indicator of the health of a financial institution.
Capital adequacy ratio (CAR) is defined as a ratio of total bank
capital to total risk-weighted assets of a financial institution. Basel
I, is primarily focused on credit risk and appropriate
risk-weighting of assets . Assets of banks were classified and
grouped in five categories according to credit risk, carrying risk
weights of 0% ( cash, bullion, home country debt like Treasuries),
20% (securitisations such as mortgage-backed securities (MBS)
with the highest AAA rating) 50%, 100% (for example, most
corporate debt), and some assets given No rating. Banks with an
international presence are required to hold capital equal to 8% of
their risk-weighted assets (RWA).

 Basel II

Basel II uses a "three pillars" concept

(1) minimum capital requirements
(addressing risk), (2) supervisory review and
(3) market discipline.Basel II recommends
that minimum capital requirement of 8%
should be maintained. Basel II norms
recommend elaborate credit risk
measurement as well as measurement of
operational risk while calculating risk
weighted asset

 Findings of the study

1. Three accords on Basel committee were established and they
mainly focus on the bank to keep the adequate amount of capital on
the basis of their risk weighted assets.
2.
In order to solve the inefficiencies in the Basel I and II, Basel III
norms were established and are implemented in banking sector
through a phased manner. Basel III framework is mainly established to
reinforce banks soundness by imposing on them stricter capital rules.
With these new rules banks will have a higher quantity and quality
capital enabling them to easily cope with a potential financial distress.
3. The Basel III guidelines would become effective from January 1,
2013 in a phased manner. This means that as at the close of
business on January 1, 2013, banks must be able to declare or
disclose capital ratios computed under the amended guidelines The
Basel III capital ratios will be fully implemented as on March 31, 2018

Conclusion.
The main objective of Basel Committee is regulating banks for the purpose of
strengthening the banking sector and the quality of banking supervision. The
Committee seeks to improve the stability of financial markets throughout the
world and to set up equal banking supervision rules between the different
countries.Basel III framework is mainly established to reinforce banks
soundness by imposing on them stricter capital rules. With these new rules
banks will have a higher quantity and quality capital enabling them to easily
cope with a potential financial distress. To meet these capital requirements,
banks will have to increase their capital and to reduce various types of risk.
As Basel III framework affects the financial sector, it necessarily affects the
real sector. Although the Basel Committees rules target is banks, the other
market participants such as depositors and borrowers are directly affected by
these rules since they are affected by banks decisions and actions. Basel III
accord requirements for banks to hold higher capital buffers with better
quality, represents a way to reassure savers and to build up again confidence
between banks and depositors.

 THANK YOU