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Basel Norms
The Basel Committee on Banking Supervision issues worldwide banking regulations known as Basel norms or Basel accords.
For the sake of the global financial system, the Basel rules aim to harmonise banking laws across countries. Banks and the financial system are the subject of this series of Basel Committee on Banking Supervision accords.
As a global standard-setter for bank prudential supervision, the Basel Committee on Banking Supervision (BCBS) provides a forum for central banks throughout the globe to interact on a regular basis. The Group of Ten central bank governors created it in 1974.
In 2009, the committee expanded its membership, and again in 2014. The BCBS now has 45 members from 28 countries, including representatives from the world’s central banks and banking regulatory organisations. Regular meetings are held here to discuss banking supervisory concerns.
To improve global financial supervision quality, it aims to raise awareness of key supervisory problems.
Preference of these Norms
Banks lend to a variety of borrowers, each with their own set of risks. They lend money from public deposits as well as money raised in the market (equity and debt).
As a result, the bank is exposed to a variety of default risks, which causes them to fall at times. Hence, banks must set aside a specific amount of capital as a buffer against the risk of non-recovery.
To address this risk, the Basel Committee created the Basel Norms for Banking.
Reason behind the name “Basel”
Basel is a city in the Swiss canton of Bern.
It is the headquarters of the Bureau of International Settlements (BIS), an organisation that promotes cooperation among central banks with the purpose of financial stability and common banking laws.
It was established in 1930.
The BIS headquarters in Basel, Switzerland, are home to the Basel Committee on Banking Supervision.
More about These Norms
Basel-I, II, and III are the three sets of regulations produced by the Basel Committee.
Basel-I
It first appeared in 1988. It was virtually solely concerned with credit risk.
The likelihood of a loss arising from a borrower’s failure to repay a loan or meet contractual commitments is referred to as credit risk. It used to refer to the possibility of a lender not receiving the principal and interest owing to them. It established capital requirements for banks as well as the risk weighting framework.
The capital requirement was established at 8% of risk-weighted assets as a minimum (RWA). RWA refers to assets with varying risk characteristics. When compared to personal loans, which have no collateral, an asset secured by collateral carries fewer risks.
In 1999, India embraced the Basel-I guidelines.
Basel- II
BCBS published the Basel II guidelines in 2004.
The Basel I Accord was revised and reformed in these versions. The rules were built around three pillars, as the committee refers to them. They are as follows:
Capital Adequacy Requirements: Banks should have a capital adequacy requirement of 8% of risk assets at all times.
Supervisory Review: Banks were required to develop and implement stronger risk management procedures in order to monitor and manage the three types of risks that a bank encounters, namely credit, market, and operational risks.
Market Discipline: This necessitates more stringent disclosure obligations. Banks must report their CAR, risk exposure, and other information to the central bank.
The Basel II norms have yet to be completely implemented in India and elsewhere, despite the fact that India complies with them.
Basel- III
Basel III guidelines were published in 2010. In reaction to the financial crisis of 2008, certain recommendations were implemented.
The system needed to be strengthened further since banks in developed nations were undercapitalized, over-leveraged, and reliant on short-term funding.
It was also felt that Basel II’s size and quality of capital were insufficient to contain any additional risk.
Conclusion
Based on international banking standards, the Basel Committee on Banking Supervision (BCBS) releases the Basel Norms. A major goal of these standards is a global standardisation of banking regulations as well as an improvement in the international financial system. There are 27 members of the BCBS, including 11 from India. For the Basel Committee’s purpose, it has produced Basel I, II, and III, which are three guidelines.
