Everything You Need to Know About BASEL Norms

BASEL Norms

Before understanding the BASEL Norms, let’s get the dictionary meaning of

Norms: An accepted standard or a way of behaving or doing things that most people agree with

In simple words, we can say that a standard accepted by the global banking system is the Basel norms. Now the question arises whose standards banks need to follow? Why it is needed to follow? which standards to follow? Today we are going to learn each of the above questions in a detailed manner. Let’s get started

BIS i.e. Bank for International Settlement is an international financial organization that works with the central bank of a different country with the common goal of achieving financial stability and to regulate common business standards in the country & also globally. Member countries of this organization have to follow norms as directed by this organization. HQ of this organization is Basel, Switzerland. Hence it is called as Basel Norms.

BIS (Bank for International Settlement)

  • Oldest global financial institution and operates under the auspices of international law
  • Sixty members country/central bank have accepted Basel accords
  • The Basel Committee on Banking Supervision (BCBS) is the primary global standard-setter for financial stability & Banking supervisory matters
  • BCBS members include organizations with direct banking supervisory authority and central banks
  • The set of the agreement by the BCBS, which mainly focuses on risks to banks and the financial system is called Basel accord
  • India has accepted Basel accords for the banking system. Three Norms are issued by BIS
  • BASEL 1
  • BASEL 2
  • BASEL 3

BASEL 1 Norms

  • Introduced in 1988
  • Started capital measurement system called Basel capital accord also called Basel 1
  • The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA)
  • RWA – the minimum amount of capital that must be held by banks to reduce the risk of insolvency ( insolvency is the situation where a bank cannot raise enough cash to meet its obligations )
  • India adopted Basel 1 guidelines in 1999

BASEL 2 Norms

  • Introduced in 2004
  • Acknowledged as refined and reformed versions of Basel I accord
  • Basel II norms in India and overseas are yet to be fully implemented.
  • The guidelines were based on three parameters, which the committee calls it as 3 pillars

 3 PILLARS OF BASEL 2 NORMS

  • Capital Adequacy Requirements – Banks should maintain a minimum capital adequacy requirement of 8% of risk assets
  • Supervisory Review – According to this, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market, and operational risks
  • Market Discipline-This need increased disclosure requirements. Banks need to mandatory disclose their CAR, risk exposure, etc to the central bank

    BASEL 3

  • Introduced in 2010
  • These guidelines were proposed in acknowledgement to the financial emergency of 2008.
  • A need was thought to further extend the system as banks in the developed economies were under-capitalized, over-leveraged and had greater faith in short-term funding
  • The guidelines aim to promote a more flexible banking system by focusing on four vital banking parameters viz
    1 ) Capital
    2 ) Leverage
    3 ) Funding
    4 ) Liquidity

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