Assignment on BASEL

8/9/2019 Assignment on BASEL

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An assignment on

Analysis among BASEL I, II III

Course Title: Strategic Banking

Course Code: FNB – 406

Submitted to

Md. Alamgir HossenAssistant Professor

Submitted by

Tanima Sarker (Student ID: 594)

BBA, Batch - 02

Department of Finance and Banking

Jahangirnagar University

Savar, Dhaka-1342

28th August, 2014


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Basel

The Basel Accords are some of the most influential—and misunderstood—agreements in modern

international finance. It is a set of agreements set by the Basel Committee on Bank Supervision (BCBS),

which provides recommendations on banking regulations in regards to capital risk, market risk and

operational risk.

Basel Committee

Basel are products of the Basel Committee—a group of eleven nations. After the messy 1974 liquidation

of the Cologne-based Bank Herstatt, decided to form a cooperative council to harmonize banking

standards and regulations within and among all member states. Their goal is to “…extend regulatory

coverage, promote adequate banking supervision, and ensure that no foreign banking establishment can

escape supervision”. To achieve this goal, France, Germany, Italy, Japan, the Netherlands, Sweden,

Switzerland, United Kingdom, United States, and Luxembourg agreed in Basel, Switzerland to form a

quarterly committee comprising of each country’s central banker and lead bank supervisory authority.

At each meeting, the authorities of each country are authorized to discuss the status of the international

banking system and propose common standards that can assist the Committee in achieving its goals, but

as the Founding Document clearly states, the Basel Committee cannot enact legally binding banking

standards. Therefore, it is up to the member states themselves to implement and enforce the

recommendations of the Basel Committee.

Basel I

The Basel I accord has been promoted by the Basel Committee in 1988 and subsequently implemented

by the banks starting with 1992. It considered market and credit risk in the measurement of capital

adequacy and covered at first issues related to capital measurement (1st and 2nd tier), risk weighting

(associated to various asset classes – 0%, 20%, 50% and 100%) and capital adequacy rules (8% ratio of

capital to risk weighted assets). It has 4 pillars:

Criticisms of Basel I

Basel-I was failed for incorporating risk into the calculation of capital requirements. It also criticize for

taking a too simplistic approach to setting credit risk weights and for ignoring other types of risk.

The Constituentsof Capital

• Tier I Capital

• Paid up Capital

• DisclosedReserves

• Tier II Capital

Risk Weighting

• Characterizedassetsaccording torisks

A Target StandardRatio

• Set a universalstandard

• 8% riskweighted

assets must becovered by

TIER I and II

Transitional and

Implimenting

Agreement

• Central Bankare requestedto createstrong

surveillenceandenforcement

mechanism


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Basel II

In response to the banking crises of the 1990s and the aforementioned criticisms of Basel I, the Basel

Committee decided in 1999 to propose a new, more comprehensive capital adequacy accord. This is

known as Basel II. It has 3 pillars:

Under pillar 1, if the bank’s own internal calculations show that they have extremely risky, loss-

prone loans that generate high internal capital charges, their formal risk-based capital charges

should also be high. Likewise, lower risk loans should carry lower risk-based capital charges. It also

adds a new capital component for operational risk. pillar 2 is the supervisory review process .Banks

are advised to develop an internal capital assessment process and set targets for capital to

commensurate with the bank’s risk profile. Supervisory authority is responsible for evaluating how

well banks are assessing their capital adequacy. Pillar 3 considers market discipline. It is an indirect

approach that assumes sufficient competition within the banking sector.

Criticisms of Basel II

Unlike Basel I and Basel II which are primarily related to the required level of bank loss reserves that

must be held by banks for various classes of loans and other investments and assets that they have,

Basel III is primarily related to the risks for the banks of a run on the bank by requiring differing levels of

reserves for different forms of bank deposits and other borrowings.

Basel III

Basel III guidelines were released in December 2010. The financial crisis of 2008 was the main reasonbehind the introduction of these norms. A need was felt to further strengthen the system as banks in

the developed economies were under-capitalized, over-leveraged and had a greater reliance on short

term funding. Also the quantity and quality of capital under Basel II were deemed insufficient to contain

any further risk. The purpose is to promote a more resilient banking system by focusing on four vital

banking parameters viz. Capital, Leverage, Funding and Liquidity.


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Comparisons among Basel I, II and III

Topic Basel I Basel II Basel III

Introduction 1988: Credit Risk

1996: Market Risk

2004 2010

Types of RiskCovered

Credit Risk Market Risk


Operational Risk


Operational Risk

Liquidity Risk

Counter Cycle Risk

Main Tools ofRisk

Management

Capital to Risk

Weighted

Assets Ratio

(CRAR)

CRAR

Supervisory Review

Market Discipline

CRAR

Supervisory Review

Market Discipline

Liquidity Coverage Ratio

Counter Cycle Buffer

Capital Conservation

Buffer

Leverage Ratio

Ways of

Calculation of

Risk Weighted

Assets and CRAR

Simple but

standard

4 major risk

categories of

assets and risk

weights

according to it

From simple to

complex and flexible

approach

Lesser risk weights in

complex approach

Same as Basel II but additional

capital for capital

conservation and counter

cycle buffer

Major

Contribution

First international

measure to cover

banking risk

Covered operational

risk apart from credit

and market risk

Recognized

differentiation and

brought flexibility

Better asset quality

helped banks to

reduce capital

requirements

Liquidity risk management

Will help to build capital

during good time, which

can be used in stressed

situation like counter cycle

buffer

Introduction of capital

conservation buffer

Limitation Too simple to

cover all risks

Banks had to

raise additionalcapital

Additional capital

requirements for

operational risk

Subprime crisisexpose the

inadequate credit and

liquidity risk covers of

banks

Requirement of additional

CRAR between 2.5% to 5%

Increased requirement of

common equity sharecapital

Implementation

in Bangladesh

1994 2007 2014

Documents

Assignment on BASEL