1. MANAGEMENT OF FINANCIAL INSTITUTUIONS
BASEL II NORMS
BY
Amit BelapurkarS-04
A Bhattacharya S-10
Ankur RastogiS-09
S V BhaskarS-49
Swati Sangal S-63

2. BASEL ACCORDS
Refers to banking supervision Accords (recommendations on banking laws and regulations), Basel I and Basel II issued by the Basel Committee on Banking Supervision(BCBS).
Called the Basel Accords as the BCBS maintains its secretariat at the Bank of International Settlements in Basel, Switzerland
3. Background
Under capital requirements rules, credit institutions like banks must at all times maintain minimum financial capital, to cover the risks
Aim - to ensure financial soundness of such institutions, maintain customer confidence in the solvency of the institutions, ensure stability of financial system at large, and protect depositors against losses.
Basel Committee on Banking Supervision established in 1974 to provide a forum for banking supervisory matters. Members are from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, UK and USA.
4. Background
Basel Committee not a formal regulatory authority, but has great influence over supervising authorities in many countries.
Committee hopes to achieve common approaches and common standards across member countries, without detailed harmonisation of each member country's supervisory techniques.
In 1988, recognising the emergence of larger more global financial services companies, the Committee introduced Basel Capital Accord (Basel I) to strengthen soundness and stability of international banking system by requiring higher capital ratios.
5. Background
Since 1988, the framework of Basel I progressively introduced not only in member countries but also in virtually all other countries with active international banks.
In June 1999, proposal issued for a new Capital Adequacy framework to replace Basel I.
After extensive communication with banks and industry groups, the revised framework, Basel II issued in 2004.
Basel II has been or will be implemented by regulators in most jurisdictions but with varying timelines and may be restricted methodologies.
6. BASEL II
The second of the Basel Accords.
Purpose is to create an international standard that banking regulators can use when creating regulations about capital banks to be put aside to guard against financial and operational risks
An international standard can help protect the international financial system from possible problems should a major bank or a series of banks collapse.
Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through lending and investment practices.
Greater the risk greater the amount of capital bank needs to hold to safeguard its solvency and overall economic stability.
7. FINAL OBJECTIVE
Ensuring that capital allocation is more risk sensitive
Separating operational risk from credit risk, and quantifying both
Attempting to align economic and regulatory capital more closely to reduce scope for regulatory arbitrage
8. Why BASEL II
Basel I Accord succeeded in raising total level of equity capital in the system.
However, it also pushed unintended consequences.
Since it does not differentiate risks very well, it perversely encouraged risk seeking. All loans given to corporate borrowers were subject to the same capital requirement, without taking into account ability of the counterparties to repay.
It ignored credit rating, credit history, risk management and corporate governance structure of all corporate borrowers. All were treated as private corporations.
It also promoted loan securitization that led to the unwinding in the subprime market.
9. Why BASEL II
Basel II much more risk sensitive, as it is aligning capital requirements to risks of loss. Better risk management in a bank means bank may be able to allocate less regulatory capital.
The objective of Basel II is to modernise existing capital requirements framework to make it more comprehensive and risk sensitive.
The Basel II framework therefore designed to be more sensitive to the real risks that firms face than Basel I.
Apart from looking atfinancial figures, it also considers operational risks, such as risk of systems breaking down or people doing the wrong things, and also market risk.
10. Three Pillars of Basel II Framework

Pillar 1 sets out the minimum capital requirements firms will be required to meet to cover credit, market and operational risk.

11. Pillar 2 sets out a new supervisory review process. Requires financial institutions to have their own internal processes to assess their overall capital adequacy in relation to their risk profile. 12. Pillar 3 cements Pillars 1 and 2 and is designed to improve market discipline by requiring firms to publish certain details of their risks, capital and risk management as to how senior management and the Board assess and will manage the institution's risks.