BASEL III NORMS

 

About BASEL norms

·         Basel Committee on Banking Supervision is an international committee formed in 1974 to develop standards for banking regulation.

·         It consists of central bankers from 27 countries and the European Union. It is headquartered in the office of Bank for International Settlements (BIS) in Basel, Switzerland.

·         It developed a series of policy recommendations known as Basel Accords (Basel I Basel II and Basel III), which suggested minimum capital requirements to keep bank solvent during the times of financial stress.

Implementation of Basel-III were deferred by a year to January 2023, due to Covid-19 pandemic.

The Basel III accord

·         Basel III accord is a set of financial reforms that was developed by the Basel Committee on Banking Supervision (BCBS), with the aim of strengthening regulation, supervision, and risk management within the banking industry.

·         Due to the impact of the 2008 Global Financial Crisis on banks, Basel III was introduced to

improve the banks’ ability to handle shocks from financial stress and to strengthen their transparency and

disclosure.

·         Basel III norms were finalised in 2017. Its implementation date has been postponed several times.

·         The guidelines focus on four banking parameters: capital, leverage, funding and liquidity.

·         Basel-III norms:

o   Minimum capital requirements for banks is 4.5% of common equity, as a percentage of the bank’s risk- weighted assets. (Currently 2% under Basel II).

o   Leverage Ratio: It is ratio of Tier 1 capital by the average total consolidated assets of a bank. Under this, banks are required to hold a leverage ratio in excess of 3%. It was introduced under Basel-III.

o   Basel III introduced two liquidity ratios. Liquidity Coverage Ratio and the Net Stable Funding Ratio.

ü  The Liquidity Coverage Ratio requires banks to hold sufficient highly liquid assets that can withstand a 30-day stressed funding scenario as specified by the supervisors.

ü  Net Stable Funding Ratio (NSFR) requires banks to maintain stable funding above the required amount of stable funding for a period of one year of extended stress.

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