The Basel Committee on Banking Supervision

  • December 20, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
No Comments

 

 

The Basel Committee on Banking Supervision

Subject :Economy

Context:

The Group of Governors and Heads of Supervision  endorsed global prudential standards for banks to limit their exposure to crypto.

Details:

  • It seeks to limit the exposure of banks to crypto to manage the risks associated with this volatile commodity.
  • Crypto assets are categorized into two groups:
    • One that fully meets a set of predetermined conditions and will be subjected to the capital requirements established in the Basel Committee’s existing framework
    • Another that meets none of the conditions-bank’s total exposure will be limited to a maximum of 2% of Tier 1 capital, while less than 1% level of exposure.

The Basel Committee on Banking Supervision: 

  • It was established by the Central Bank governors of the Group of Ten countries in 1974.
  • The Basel Committee on Banking Supervision is an organization made up of 45 members, comprising central banks and bank supervisors from 28 jurisdictions. 
  • It is the primary global standard setter for the prudential regulation of banks. 
  • Additionally, it provides a forum for regular cooperation on banking supervisory matters.
  • It doesn’t have any formal authority over banks due to their decisions having no legal force, the members work together to achieve the mandate set out by it.
  • The Group of Governors and Heads of Supervision (GHOS) overseeing the Basel Committee . This group sets out the general agenda and approves the committee’s charters.

Basel Norms:

  • The Basel Committee on Banking Supervision (BCBS) issues Basel Norms for international banking regulations.
  • The goal of these norms is to strengthen the international banking system by coordinating banking regulations around the world.
  • The Basel Committee has currently issued three guidelines to achieve its goal: Basel I, II, and III.
  • Basel I
    • It was introduced in 1988.
    • It was almost entirely concerned with credit risk.
    • It established the capital and risk-weighting structure for banks.
    • The required minimum capital was set at 8% of risk-weighted assets (RWA).
      • RWA refers to assets with varying risk profiles. For example, an asset backed by collateral would be less risky than a personal loan with no collateral.
    • Capital is divided into two categories: Tier 1 capital and Tier 2 capital.
      • Tier 1 capital is the bank’s core capital because it is the primary measure of the bank’s financial strength. The majority of core capital is made up of disclosed reserves (also known as retained earnings) and paid-up capital. It also includes non-cumulative and non-redeemable preferred stock.
      • Tier 2 capital – It is used as supplemental funding since it is less reliable than the first tier.It consists of undisclosed reserves, preference shares, and subordinate debt.
    • In 1999, India adopted the Basel 1 guidelines.
  • Basel II
    • In 2004, Basel II guidelines were published by BCBS.
    • These were the refined and reformed versions of Basel I accord.
    • The guidelines were based on three parameters, which the committee calls it as pillars.
      • 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 needs increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank.
    • Basel II norms in India and overseas are yet to be fully implemented though India follows these norms.
  • Basel III
    • In 2010, Basel III guidelines were released.
    • These guidelines were introduced in response to the financial crisis of 2008.
    • The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.
      • Capital: The capital adequacy ratio is to be maintained at 12.9%. The minimum Tier 1 capital ratio and the minimum Tier 2 capital ratio have to be maintained at 10.5% and 2% of risk-weighted assets respectively.In addition, banks have to maintain a capital conservation buffer of 2.5%. Counter-cyclical buffer is also to be maintained at 0-2.5%.
      • Leverage: The leverage rate has to be at least 3 %. The leverage rate is the ratio of a bank’s tier-1 capital to average total consolidated assets.
      • Funding and Liquidity: Basel-III created two liquidity ratios: LCR and NSFR.
        • The liquidity coverage ratio (LCR) will require banks to hold a buffer of high-quality liquid assets sufficient to deal with the cash outflows encountered in an acute short term stress scenario as specified by supervisors. The goal is to ensure that banks have enough liquidity for a 30-days stress scenario if it were to happen.
        • The Net Stable Funds Rate (NSFR) requires banks to maintain a stable funding profile in relation to their off-balance-sheet assets and activities. NSFR requires banks to fund their activities with stable sources of finance (reliable over the one-year horizon). The minimum NSFR requirement is 100%.
economy The Basel Committee on Banking Supervision