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GROUP MEMBERS
RAO ATEEQ-UR-RAHMAN MBED-10-08 MUHAMMAD IMRAN DASTI MBED-10-10 NADIR ALI MBED-10-17 SHAHBAZ MAHDI MBED-10-28

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. BASEL II

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Need of Capital Adequacy in Banks


Banks are special class of business (along with insurance / prize bonds) where special regulations are needed to protect the depositors; Non-willingness of depositors to participate in profit and loss sharing (true Islamic Banking); Debt/equity ratio is extremely high as compared to the normal entity, which exposes depositors to unforeseen losses;

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Need of Capital Adequacy in Banks

Pricing mechanism may not reflect the underlying business risks due to competitive pressures; Above issues clearly indicates that adequate capital level is a necessity for any bank to maintain to ensure that it have sufficient buffer against unforeseen losses.

This is because bulk of the business is Promise based.

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Bank Failure Reasons

Credit risk (real estate lending) and market risk caused major failures in banking industries; Recession in economy causing decline in real estate value cause banking failures; Financial liberalization and poor supervisory controls a common cause of major banking crises;

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Basel 1 features
Published Basel

in 1988 in Switzerland

is the name of city located in Switzerland having population 168000 focused on credit risk name for the accords is derived from Basel, Switzerland, where the committee that maintains the accords meets.

Primarily The

BASEL CITY MAP

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BASEL 1
A

set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%)of capital based on a percent of risk-weighted assets.

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Risk weighted assets


A

bank's assets weighted according to credit risk. Some assets, such as debentures, are assigned a higher risk than others, ...

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BASEL 2 Definition
Basel

II is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations. The Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision (BSBS).

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Basel 2 features
International Introduced Created Link

Standards

in 2004

by the central bank governors of the G20 Nations between regulatory capital and risk based supervision

Argentina G20 Nations

Japan Mexico Russia Saudi Arabia South Africa South Korea Turkey United Kingdom United States European Uni
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Australia Brazil Canada China France Germany India Indonesia

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Basel 2 features
Enhance Proactive Proactive Focus

market discipline

risk management and assessment supervisory assessment is on operational risk in addition to credit and market risk;

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Basel 2 objectives
Safety

and soundness:

Promote safety and soundness of the financial system


Competitiveness:

continue to enhance competitive equality Approaches:


Promote

comprehensive approach that are sensitive to the risk involved in a

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Objectives
Greater use of the roles played by bank management (pillars 1 and 2) and the market (pillar 3) Encourage banks to improve risk management capabilities Comprehensive coverage of risks

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Difference between Basel 1 & Basel 2


The

main difference is that the Basel I accord mainly focused on capital requirements for banks. The Basel II adds supervision and market discipline to these capital requirement through the "Three Pillar" concept. ..

Basel II: The Three Pillars

Perfect rules are not feasible - no perfect measurement system - difficult balance between accuracy and simplicity

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Three Pillars
The

first pillar is about capital requirement The second pillar is about regulation and

supervision.
The

third pillar describes market discipline

Basel committee On bank supervision (bcbs)


Established

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by Central Bank Governors in 1974, which strives to improve guidelines placed on banks by the central bank or semilar authorities.

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Relationship of the Three Pillars


Pillar

1: A quantitative approach to minimum capital requirements 2: Banks should have a process for assessing their overall capital adequacy; supervisors will review this process and require additional capital if necessary

Pillar