Section I |
Part I
BASEL ACCORD
Section I |
Part I
BASEL ACCORD
• Introduction
• Different Kinds of Bank Capital
• Shareholder
• Regulatory – Core, Tier I, Tier II
• Economic
• Pillars of Basel Accord
• Basel I
• Basel II
• Basel III
• Major Revisions Included in Basel III
• Capital Definition
• Leverage Ratio
• Liquidity Requirements
• Liquidity Coverage Ratio
Section I |
Part I
INTRODUCTION
• Basel accords are an international banking supervision accords issued by
Basel committee on Banking supervision.
• The Basel Committee was formed in 1974 by central bankers from the G10
countries.
• It was by then referred to as the Committee on Banking Regulations and
Supervisory Practices.
• It was formed in the aftermath of serious disturbances in international
currency and banking markets (notably the failure of Bankhaus Herstatt in
West Germany).
• The main objective was to enhance financial stability by improving the
quality of banking supervision worldwide, and to serve as a forum for
regular cooperation between its member countries on banking supervisory
matters
• The committee expanded its membership in 2009 and then again in 2014.
Section I |
Part I
INTRODUCTION
• The Basel Committee on Banking Supervision (BCBS) now has 45 members
from 28 Jurisdictions, consisting of Central Banks and authorities with
responsibility of banking regulation.
• The mandate of the Basel committee is to strengthen the regulation,
supervision and practices of banks worldwide with the purpose of
enhancing financial stability.
• The Committee seeks to achieve its aims by:
• Setting minimum standards for the regulation and supervision of banks;
• Sharing supervisory issues, approaches and techniques to promote common
understanding and to improve cross-border cooperation;
• Exchanging information on developments in the banking sector and financial
markets
• Helping identify current or emerging risks for the global financial system
Section I |
Part I
FORMS OF BANK CAPITAL
• There are 3 different forms of bank capital specified by Basel
accord:
• Shareholder capital – refers to the capital on the SOFP
• Regulatory capital
• Core capital – share capital and reserves
• Tier I – includes preference shares
• Tier II – undisclosed and revaluation reserves, provision for losses,
hybrid securities and subordinated debt.
• Economic capital – refers to capital they need to hold to carry
out their transactions
Section I |
Part I
BASEL ACCORD PILLARS
• Pillars of Basel Accord include:
Minimum capital requirements
• Pillar 1 takes into consideration operational risks in addition
to credit risks associated with risk-weighted assets (RWA).
• It requires banks to maintain a minimum capital adequacy
requirement of 8% of its RWA.
• It provides banks with more informed approaches to calculate
capital requirements based on credit risk, while taking into
account each type of asset’s risk profile and specific
characteristics.
Section I |
Part I
BASEL ACCORD PILLARS
• Pillars of Basel Accord include:
Supervisory requirements
• Pillar 2 was added owing to the necessity of efficient supervision and lack
thereof in Basel I, pertaining to the assessment of a bank’s internal capital
adequacy.
• Under Pillar 2, banks are obligated to assess the internal capital adequacy
for covering all risks they can potentially face in the course of their
operations.
• The supervisor is responsible for ascertaining whether the bank uses
appropriate assessment approaches and covers all risks associated.
• Supervisors are obligated to review and evaluate the internal capital
adequacy assessments and strategies of banks, as well as their ability to
monitor their compliance with the regulatory capital ratios.
Section I |
Part I
BASEL ACCORD PILLARS
• Pillars of Basel Accord include:
Market discipline via disclosure
Pillar 3 aims to ensure market discipline by making it mandatory
for banks to disclose relevant market information.
This is done to make sure that the users of financial information
receive the relevant information to make informed trading
decisions and ensure market discipline.
Section I |
Part I
BASEL I
• The main risk of concern for Basel I was credit risk. Therefore, Basel I
set capital charges against credit risk based on a set of relatively
simple rules including:
• A minimum capital ratio of capital to risk-weighted assets of 8%.
• In January 1996, there was a major amendment to Basel I, leading to
the consideration of a new risk.
• The Committee issued the so-called Market Risk Amendment to the
Capital Accord to take effect at the end of 1997.
• This was designed to incorporate within the Accord a capital
requirement for the market risks arising from banks’ exposures to
foreign exchange, traded debt securities, equities, commodities and
options.
Section I |
Part I
BASEL II
• In June 2004, the Accord underwent a fundamental revision, which
created more risk- sensitive capital requirements and added a
charge against operational risk.
• This was not random and was primarily for internet and
technological companies to prevent fraud and scandals.
• This new Accord was called Basel II.
• The credit crisis that started in 2007 revealed weaknesses in the
regulatory framework.
• Some banks that appeared sufficiently capitalised experienced major
losses that in many cases required government support.
• In response, the Basel Committee implemented changes to the Basel
II framework – known as Basel III.
Section I |
Part I
BASEL III
• Basel III was introduced with the objective of the reforms to improve
the banking sector’s ability to absorb shocks arising from financial
and economic stress, whatever the source.
• This was to reduce the risk of spill overs from the financial sector to
the real economy.
• This is to be achieved by improving risk management and
governance as well as strengthening banks’ transparency and
disclosures.
• However, one of the main reasons the economic and financial crisis,
which began in 2007, became so severe was that the banking sectors
of many countries had built up excessive on- and off-balance sheet
leverage.
Section I |
Part I
BASEL III major revisions
Capital Definition
• The definition of what constitutes acceptable capital was changed to
exclude some components that turned out not to provide the desired
protection during the credit crisis.
• The committee placed a greater focus on going-concern loss-
absorbing capital in the form of Common Equity Tier 1 (CET1) capital.
Leverage Ratio
• The BCBS introduced a limit on the leverage ratio.
• This is because some banks had adequate capital using Basel II rules
but ran into difficulties because of their high leverage. The current
proposal is to require a minimum leverage capital ratio of 3%, to be
included in Pillar I by January 2018.
Section I |
Part I
BASEL III major revisions
Liquidity Requirements
• Throughout the financial crisis, many banks struggled to maintain
adequate liquidity.
• As a result, the BCBS introduced a global minimum liquidity
standard.
• This includes a 30-day liquidity coverage ratio (LCR), which would
allow the bank to convert assets into cash to meet liquidity needs
under stress scenario.
• The objective of the LCR is to promote the short-term resilience of
the liquidity risk profile of banks.
Section I |
Part I
BASEL III major revisions
• It does this by ensuring that banks have an adequate stock of high-
quality liquid assets (HQLA).
• The assets can be converted easily and immediately in private
markets into cash to meet their liquidity needs for a 30- calendar
day liquidity stress scenario.
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