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Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on
Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking
regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and
operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial
system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to
accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves
appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the
greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall
economic stability.
Objective
3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.
While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will
Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important
Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market
The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk,
was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.
The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit
risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this stage.
The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized
approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach".
For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or TSA, and the internal
measurement approach (an advanced form of which is theadvanced measurement approach or AMA).
For market risk the preferred approach is VaR (value at risk).
As the Basel 2 recommendations are phased in by the banking industry it will move from standardised requirements to more refined and
specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their
own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In future there will be
closer links between the concepts of economic profit and regulatory capital.
1. Standardised Approach
The standardised approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories are used under
Basel 1 and are 0% for short term government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100%
weighting on unsecured commercial loans. A new 150% rating comes in for borrowers with poor credit ratings. The minimum capital
requirement (the percentage of risk weighted assets to be held as capital) remains at 8%.
For those Banks that decide to adopt the standardised ratings approach they will be forced to rely on the ratings generated by external
The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them
under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension
risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under the title of residual risk.
On September 30, 2005, the four US Federal banking agencies (the Office of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision) announced their revised plans for
the U.S. implementation of the Basel II accord. This delays implementation of the accord for US banks by 12 months.[1]
On November 15, 2005, the committee released a revised version of the Accord, incorporating changes to the calculations for market risk
and the treatment of double default effects. These changes had been flagged well in advance, as part of a paper released in July 2005.[2]
On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II Framework, the
elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate
Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A
Revised Framework. No new elements have been introduced in this compilation. This version is now the current version.[3]
On November 1, 2007, the Office of the Comptroller of the Currency (U.S. Department of the Treasury) approved a final rule implementing
the advanced approaches of the Basel II Capital Accord. This rule establishes regulatory and supervisory expectations for credit risk, through
the Internal Ratings Based Approach (IRB), and operational risk, through the Advanced Measurement Approach (AMA), and articulates
enhanced standards for the supervisory review of capital adequacy and public disclosures for the largest U.S. banks.[4]
On July 16, 2008 The federal banking and thrift agencies ( The Board of Governors of the Federal Reserve System; the Federal Deposit
Insurance Corporation; the Office of the Comptroller of the Currency, and; the Office of Thrift Supervision) issued a final guidance outlining
the supervisory review process for the banking institutions that are implementing the new advanced capital adequacy framework (known as
Basel II). The final guidance, relating to the supervisory review, is aimed at helping banking institutions meet certain qualification
requirements in the advanced approaches rule, which took effect on April 1, 2008. [5]
For public consultation, a series of proposals to enhance the Basel II framework was announced by the Basel Committee. It releases a
consultative package that includes: the revisions to the Basel II market risk framework; the guidelines for computing capital for incremental
risk in the trading book; and the proposed enhancements to the Basel II framework.[6]
A final package of measures to enhance the three pillars of the Basel II framework and to strengthen the 1996 rules governing trading book
capital was issued by the newly expanded Basel Committee. These measures include the enhancements to the Basel II framework, the
revisions to the Basel II market-risk framework and the guidelines for computing capital for incremental risk in the trading book.[7]
One of the most difficult aspects of implementing an international agreement is the need to accommodate differing cultures, varying structural
models, and the complexities of public policy and existing regulation. Banks’ senior management will determine corporate strategy, as well as
the country in which to base a particular type of business, based in part on how Basel II is ultimately interpreted by various countries'
To assist banks operating with multiple reporting requirements for different regulators according to geographic location, there are several
software applications available. These include capital calculation engines and extend to automated reporting solutions which include the
For example, U.S. FDIC Chair Sheila Bair explained in June 2007 the purpose of capital adequacy requirements for banks, such as the
accord: "There are strong reasons for believing that banks left to their own devices would maintain less capital -- not more -- than would be
prudent. The fact is, banks do benefit from implicit and explicit government safety nets. Investing in a bank is perceived as a safe bet.
Without proper capital regulation, banks can operate in the marketplace with little or no capital. And governments and deposit insurers end
up holding the bag, bearing much of the risk and cost of failure. History shows this problem is very real … as we saw with the U.S. banking
and S & L crisis in the late 1980s and 1990s. The final bill for inadequate capital regulation can be very heavy. In short, regulators can't leave
capital decisions totally to the banks. We wouldn't be doing our jobs or serving the public interest if we did.[8]
[edit]Implementation progress
Regulators in most jurisdictions around the world plan to implement the new Accord, but with widely varying timelines and use of the varying
methodologies being restricted. The United States of America's various regulators have agreed on a final approach.[9] They have required the
Internal Ratings-Based approach for the largest banks, and the standardized approach will not be available to anyone.
In India, RBI has implemented the Basel II standardized norms on 31st March 2009 and is moving to internal ratings in credit and AMA
In response to a questionnaire released by the Financial Stability Institute (FSI), 95 national regulators indicated they were to implement
The European Union has already implemented the Accord via the EU Capital Requirements Directives and many European banks already
report their capital adequacy ratios according to the new system. All the credit institutions adopted it by 2008.
Australia, through its Australian Prudential Regulation Authority, implemented the Basel II Framework on 1 January 2008[11].
Basel II
Basel II
Background
Banking
Regulatory capital
Tier 1 - Tier 2
Credit risk
Standardized - F-IRB - A-IRB
PD - LGD - EAD
Operational risk
Market risk
Economic capital
Disclosure
What is GDR?
GDR is a certificate issued by depository bank by which we trade in securities of foreign countries.
What is Repo
A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed
date.
Repo rate is the rate at which RBI lends money to other banks
fixed asset means the value of the asset is more than one yearis called fixed asset ex- Building, Machinery and all....
curerent asset means the value of the asset is less than one year is called current asset ex-debtors, stock(inventory) and
all..
Fixed Assets are longterm like buildings, machines etc. whereas Current assets are used in day-today transctions which is
short-term in nature i.e. not more than 1 year.
p&l account- shows the profit or loss to the organisation to the particular period
balace sheet- shows the financial position of the organisation like solvency or insolvency
P/L account shows the profit and loss of the organisation of a particular financial year whereas BS shows the financiall
position and performance of the organisation.
What is GDR?
What is SEBI?
Securities and Exchange Board of India, which regulates the security market of India by its formulated rules and
regulations.
What is debt?
What is Liability
book value means the value of any asset showen in financial statements
real account tells about the assets which come into the organisation & which goes out to the organisation
princpal
debit all the assets which comes into the organisation
credit all the assets which goes out to the organisation
List out the differences between Funds Flow and Cash Flow statements?
cash flow statement tells about the cash inflows and outflows to the organisation
funds flow statment tells about working capital changes in the organisation
what is perpose of derivatives?
Secondary market refers to market where securities are traded after being initially offered to the public in the primary
market and/or listed on the stock exchange.
Financial instrument is considered as liquid instrument when they changes hand after tehy are issued.As corporate or
goverment agencies issue securities in primary market to raise fund and these securities are traded in secondry market
after they are issued in primary market.
Secondary market is simply interaction between investors.
What is Bond?
In chemistry bond means interaction between two atoms for the purpose to complete their outermost shells
What is EPS
What is NP
NP is equal to the Gross Profit minus overheads and interest payable for an accounting period
The Balance Sheet of the firm consists of two sides.One is the righthand side and the other is the lefthand side.Lefthand
side contains all liabilities of the firm and righthand side contains all assets.
through this statement we come to know about financial possition of the company
What is a share
The ratio which is used to know the liquidity position of the firm is known as "Liquidity Ratio".
liquidity ratio tells about the position of the company to get from the liquidity of the firm.liquidity ratio is calculated by the
considering the debt of the company as the equity holder are those who will get the return of the investment at last after
the payment of the debt holder.so the company is more liquid which have lower debt to equity ratio.
ADR IS AMERICAN DEPOSITORY RECEIPT.indian company raise the fund from abroad by issuing equity to foreign
investor.ADR is receipt which is issued on basis of underlying equity.ADR is traded in american bourse to insure the
liquidity.The price of ADR is alligned with the equity that is listed in indian stock exchange.The price is such to reduce the
arbitrage.
ADR is issued by non american company and it is listed in american stock exchange.
company deposit is defined as liability of company when it invited deposit from the investor.company deposit can be asset
of the company when one company deposit with other company.
What is Beta?
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Risk is differentiated as systematic risk or undiversifible risk and unsystematic risk or diversifible risk.Diversifible risk is
what which can be minimized by diversification but systematic risk is market risk which is not possible to diversify.The
sensitivity of stock with the market is defined as systematic risk or beta of the stock.
Interim Dividend Is Defined As The Declaration Of The Dividend By The Company Before The Annual General Meting.
Takeover Is Defined As The Purchased Of The Equty Share Of Target Company From The Market Or Institution In Order To
Take The Hold On Management.company Take The Strategy To Curb The Competitor Or Diversify The Business.take Over
Can Be Done By Mutually Negation Or It Can Be Hostile Takeover,where Targeting Company Purchase The Share From
Outside (retail) At Premium And Get Control Over Company Management.
Profit Of A Company Is Distributed As Dividend To The Preference Shareholder And Common Equity Holder,it Depends
Upon The Discretion Of The Company.the Surplus After Dividend Payment Is Retained By The Company.the Retained
Earning Is Added To The Reserve And Surplus Of The Balance Sheet.it Is Consider As The Liblity In The Balance Sheet.this
Fund Is Used As Expansion Or Accumulated Fund Is Distributed As Bonus.
2) it is a liability from the company point of view as it owe it to its shareholders, that is the reason it is added to the
reserves under the liabilities side.
What is Risk
Risk is defined as the difference between "the actual return and expected return."
RISK CAN BE DEFINED AS THE PROBABILITY OF UNEXPECTED OUTCOME TO THE EXPECTED OUTCOME.
RISK IS DEFINED AS THE PROBABILITY OF UNEXPECTED OUTCOME TO THE ACTUAL OUTCOME OF AN EVENT.
What is Hedging
Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss
from an adverse price .
HEDGING CAN BE DEFINED as a strategy to take minimize the exposure towards the risk.Risk can be defined as probability
of unexpected outcome from expected outcome.Risk could be any of as interest rate risk,default risk,currency risk,rising
price,etc.Hedging is defined as taking an opposite position in future market to lessen the risk.It couls be done by
forward,future,option,swaps.Heding offset the loss in spot market with the equal gain in the future market if it is perfect
hedge.
A Debenture is " A certificate of agreement of loans which is given under the company's stamp and carries an undertaking
that the debenture holder will get a fixed return and the principal amount whenever the debenture matures.
it is a written acknowledgement of debt, it is one of the source through which the company raises money from public,
under this the company pays interest and the debentures gets redemeed at maturity either at discount or at premium
Debenture Is The Debt Instrument Through Which Company Raises The Fund.debenture Carries A Fixed Interst Payment.it
Is A Tradable Instrument,which Can Be Traded On Bourse After It Get Listed.in Certain Case It Carries The Call Option
Where Company Can Buy Back If The Rate Of Interest Decrease.it Can Be Redemmed After Certain Period As Per The
Contact.
What is AMC
As Per The Indian Sebi Law, Company Engaged In The Business Of Mutal Fund Which Involved Pooling Of The Fund From
The Investor And Invest In Diversified Instrument To Lessen The Exposure Towards The Risk.mutal Fund Can Be
Established By Formation Of Trust As Per The Law And This Trust Establish The Asset Managment Company(amc) Which
Take Care Of The Investment Decision .so Every Amc Works Under A Trust.
What is merger
'Puts' give the buyer the right, but not obligation to sell a given quantity of underlying asset at a given price on or before
given future date.
A "Put option" gives the holder the right but not obligation to sell an asset by a certain date for a certain price
but option buyer has the right but not the obligation to sell the underlying assest.
Buyer Of Put Otion Get The Right But It Is Not An Obligation To Sell The Underlying Asset Before The Expiration Of Option
If It Is European Option And Not Between The Expiration If It Is American Option.
It is statement of balances of all the accounts in the ledger prepared to prove the arithmetical accuracy of the books of
accounts.
a statement which shows what is the balance in the various accounts maintained by the firm.
What is PAT
profit after tax, that is the net profit, profit available to the company after paying the tax
What is GP
it is Gross profit that is profit left to the company after meeting the production expenses
What is Networth
ledger posting is done after preparation of journal and subsidiary books, this is the second step in accounting process, it
helps one to know how much balance is left in an account at a particular point of time.
Net Present Value is the difference between the present value of cash inflow and the present value of cash outflow.
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Asme Standards In Pipe Line
It is a standard method for using the time value of money to appraise long-term projects.
A cash flow statement or statement of cash flow is a financial statement that shows a company's incoming and outgoing
money during a time period.
Capital market is the market for securities, where companies and governments can raise long-term funds. It inculde both
stock market and bond market.
The face value of a share is the value assigned to it by promoters of the company and this value is shown in the 'share
certificate'.
What is Treasury Bills?
Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These
are discounted securities and thus are issued at a discount to face value.
What is dividend
Dividends are payments made by a corporation to its shareholder members. Dividends are paid out of Profits or Surplus
earned by corporation or company.
'Calls' give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or
before a given future date.
Mutual funds are funds operated by an investment company which raises money from the public and invests in a group of
assets(shares, debentures etc.), in accordance with a stated set of objectives.
What is warrant
Options generally have lives of up to one year. The majority of options traded on exchange have maximum maturity of
nine months, longer dated options are called as warrants and are generally traded over-the-counter.
A Forward contract is a customized contract between two entities, where settlement takes place on a specific date in the
future at today's pre-agreed price.
Paid up capital means the total amount of called up share capital which is actually paid to the company by the members.
What is Right Issue
What is Right Issue
Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on record
date.
A market for the purchase and sale of liqiud assets especially bills of exchange,treasury bills and other securities that are
due to be redeemed within a short time.
What is ROI
ROI reveals the earning capacity of the capital employed in the business. It is calculated as:
What is depreciation
Permanent decrease in the value of an asset is know as depreciation.
What is BRS
What is ROE
What is NYSE
What is swap
An arrangement between the central banks of two countries for standby credit to facilitate the exchange of each other's
currencies.
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