Documente Academic
Documente Profesional
Documente Cultură
No:- 14,16
OVERVIEW
Prudential Norms Basel Committee BCBS Basel I Basel II Capial Adequacy and its norms Capital Funds Basel III Shortcoming of Basel II RBI Guidelines regarding Basel III Regulatory Capital Adequacy Level International regulatory framework for Banks
PRUDENTIAL NORMS
The norms which are to be followed while investing funds are called "Prudential Norms." They are formulated to protect the interests of the shareholders and depositors. Prudential Norms are generally prescribed and implemented by the central bank of the country. For international banks, prudential norms were prescribed by the Bank for International Settlements popularly known as BIS.
BASEL COMMITTEE
Basel committee appointed by BIS formulated rules and regulation for effective supervision of the central banks. For this, it also prescribed international norms to be followed by the central banks. This committee prescribed Capital Adequacy Norms in order to protect the interests of the customers.
BASEL I
Basel I is the round of deliberations by Central Bankers from around the world, and in 1988, the Basel Committee(BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group ten countries(G-10) in 1992. Basel I is now widely viewed as outmoded. Indeed, the world has changed as financial conglomerates, financial innovation and risk management have developed. Therefore, a more comprehensive set of guidelines, known as Basel II are in the process of implementation by several countries. New updates, Basel III, were developed in response to the financial crisis.
BASEL II
Basel II is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision Basel II, initially published in June 2004, was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks (and the whole economy) face.
OBJECTIVE
Ensuring that capital allocation is more risk sensitive. Enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution. Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.
3 PILLARS OF BASEL II
Minimum Capital Requirements Supervisory Review of Capital Adequacy Market Discipline
CAPITAL ADEQUACY
A measure of the adequacy of an entity's capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. Its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent. For example, under BIS (Bank for International Settlements) rules, banks are required to maintain a certain level of capital against their risk-adjusted assets. The basic approach of capital adequacy framework is that a bank should have sufficient capital to provide a stable resource to absorb any losses arising from the risks in its business.
SUBORDINATED DEBT
They should be fully paid up instruments. They should be unsecured debt. They should be subordinated to the claims of other creditors. This means that the bank's holder's claims for their money will be paid at last in order of preference as compared with the claims of other creditors of the bank. The bonds should not be redeemable at the option of the holders. This means the repayment of bond value will be decided only by the issuing bank.
Capital Funds
Market Discipline
CAPITAL
Capital refers to the funds (e.g., money, loans, equity) which are available to carry on a business, make an investment, and generate future revenue. Capital is divided into tiers according to the characteristics/qualities of each qualifying instrument. For supervisory purposes capital is split into two categories: Tier I Tier II.
CAPITAL FUNDS
Banks are required to maintain a minimum CRAR of 9% on an ongoing basis. The RBI will take into account the relevant risk factors and the internal capital adequacy assessments of each bank to ensure the capital held by a bank is commensurate with its overall risk profile.
PRUDENTIAL FLOOR
Prudential Floor should be highest in following Cases
Minimum capital required to be maintained as per the revised framework. A specified percent of the minimum capital required to be maintained as per the Basel 1 framework for credit and market risks.
Tier1 capital
Paid-up equity capital, statutory reserves and other disclosed free reserves
Capital Reserves
Tier1 capital
Interest Free Funds Statutory Reserves Capital Reserves Head Office Borrowings
Remittances
TIER2 CAPITAL
Tier2 capital
Innovative perpetual debt instruments
Revaluatio n reserves
Subordinate debt
INTRODUCTION
Basel III or Basel 3 released in December, 2010 is the third in the series of Basel Accords. These accords deal with risk management aspects for the banking sector. Global regulatory standard on bank capital adequacy, stress testing and market liquidity risk.
DEFINITION
According to Basel Committee on Banking Supervision "Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector".
FEATURES
(a) Better Capital Quality (b) Capital Conservation Buffer (c) Countercyclical Buffer (d) Minimum Common Equity and Tier 1 Capital Requirements (e) Leverage Ratio (f) Liquidity Ratios
OBJECTIVES
1. Improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source 2. Improve risk management and governance 3. Strengthen banks' transparency and disclosures.
PILLERS
Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) Pillar 2 : Supervisory Review Process Pillar 3: Market Discipline
SHORTCOMINGS OF BASEL 11
The capital requirement ratio of 4% was inadequate to withstand the huge losses that were incurred. Responsibility for the assessment of counterparty risk is assigned to the ratings agencies, which proved to be vulnerable to potential conflicts of interest. The capital requirement is pro-cyclical. Basel II incentivizes the process of securitisation.
e) banks are also required to maintain a Capital Conservation Buffer (CCB) of 2.5% of RWAs in the form of Common Equity Tier 1 capital. f) The norm forbids banks from using the consolidated capital of any insurance or nonfinancial subsidiaries for calculating capital adequacy. g) Under Basel III, several instruments, including some that have the characteristics of debt, cannot be included for arriving at tier I capital.
h) For the fiscal year ending March 2013, banks will have to disclose capital ratios computed under Basel II and Basel III. i) RBI has set the leverage ratio at 3% under Basel III.
Conservation buffer
Countercyclical buffer Common equity + Conservation buffer + Countercyclical buffer Tier I(including the buffer)
2.5 %
0-2.5 % 7-9.5 %
Nil
Nil 3.6 % (9.2 %)
8.5 -11 %
6 % ( 10 %)
10.5 -13 %
9 % (14.5 %)
CONCLUSION
Improvement in the quantity and quality of capital over a period of time that would allow growth and the financing of growth.