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Basel Norms in India, History, Types, Pillars, Purpose

Basel Norms

The Basel Norms, also known as the Basel Accords, are a set of international banking regulations that provide a framework for the supervision, regulation, and risk management of banks. These norms were developed by the Basel Committee on Banking Supervision, a group of central bankers and bank supervisors from around the world, in response to the global financial crises of the 1980s and 1990s.

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Basel Norms History for Banks

The Basel Norms are a set of international regulations for banks that aim to ensure the stability and safety of the global banking system. The Basel Norms were developed by the Basel Committee on Banking Supervision (BCBS), which is a committee of banking supervisory authorities that was established by the central bank governors of the G10 countries in 1974. Here is a brief history of the Basel Norms:

  • The first Basel Accord, Basel I, was introduced in 1988 and focused mainly on credit risk. It required banks to maintain a minimum level of capital, as a percentage of their risk-weighted assets, to absorb losses and reduce the risk of insolvency.
  • Basel II, introduced in 2004, expanded the scope of regulation to include operational risk and introduced more sophisticated risk assessment methods. It also allowed banks to use internal risk models to calculate their capital requirements.
  • Basel III, introduced in response to the global financial crisis of 2008, further strengthened the regulations by increasing the minimum capital requirements, introducing a leverage ratio to limit excessive borrowing, and introducing new liquidity requirements.
  • The latest version, Basel IV, is still being developed and is expected to introduce further refinements to the risk assessment methods used by banks, as well as changes to the way that capital requirements are calculated.

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Basel III Norms Pillars

Basel III is a set of global regulatory standards for banks that aim to strengthen their resilience and reduce the risk of financial instability. It consists of three pillars:

S. No Basel III Norms Pillars Description
1. Minimum Capital Requirements Sets out the minimum amount of capital that banks must hold to cover their credit, market, and operational risks. Banks are required to maintain a capital conservation buffer to absorb losses during periods of stress.
2. Supervisory Review Process Regulators are required to conduct a regular supervisory review of a bank’s risk management practices and capital adequacy. This includes assessing a bank’s risk profile, capital adequacy, and internal controls. Banks are required to conduct stress tests to assess their ability to withstand adverse economic conditions.
3. Market Discipline Aims to promote market discipline by requiring banks to disclose information about their risk profile, capital adequacy, and risk management practices. This includes public disclosure of their financial statements, risk management policies, and the results of their stress tests.

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Basel III Norms in India 

Basel III Norms were implemented in India in a phased manner, with full implementation scheduled to be completed by March 31, 2019. The Reserve Bank of India (RBI), India’s central bank, introduced various guidelines and regulations to ensure compliance with the Basel III norms. Here are some of the key aspects of Basel III implementation in India:

Basel III Norms in India Description
Minimum Capital Requirements The Reserve Bank of India (RBI) increased the minimum capital adequacy ratio (CAR) to 11.5% for Indian banks, which is higher than the Basel III requirement of 10.5%. The minimum Tier 1 capital requirement was also increased to 9.5%, with a capital conservation buffer of 2.5%.
Countercyclical Buffer The RBI introduced a countercyclical buffer (CCB) for Indian banks, which ranges from 0% to 2.5% of risk-weighted assets depending on the macroeconomic conditions. The CCB is designed to build up during good times and be used during bad times to ensure that banks can continue to lend and support economic growth.
Liquidity Coverage Ratio (LCR) The LCR requires banks to hold a minimum amount of high-quality liquid assets (HQLA) to meet their short-term liquidity needs. The RBI introduced the LCR in a phased manner, with a minimum requirement of 60% in 2015, increasing to 100% by January 2019.
Leverage Ratio The RBI introduced a leverage ratio requirement for Indian banks, which measures a bank’s Tier 1 capital against its total exposures. The minimum requirement was set at 4.5%, with a buffer of 2.5%.
Disclosure Requirements The RBI introduced a number of disclosure requirements for Indian banks, including regular reporting of their capital adequacy, liquidity position, and risk management practices. This information is made available to the public to promote transparency and market discipline.

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Basel I Norms

Here is a table that summarizes the details of the Basel I Norms. 

Parameter Description
Objective To ensure that financial institutions maintain adequate capital as a cushion against their risk exposures.
Capital Requirements Banks were required to maintain a minimum capital adequacy ratio (CAR) of 8%, with at least 50% of it in the form of Tier I capital.
Risk Weighting System Assets were assigned a risk weight based on their perceived riskiness, with the minimum risk weight being 0% and the maximum being 100%.
Types of Assets Only credit risk was considered while calculating risk weights. Asset classes such as equities, commodities, etc., were not covered.
Applicability It was applicable to only internationally active banks, and not to domestic banks.
Drawbacks It did not account for off-balance-sheet items, nor did it consider the creditworthiness of the borrower.

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Basel II Norms 

Here is a table that summarizes the details of the Basel II Norms. 

Parameter Description
Objective To improve the risk management practices of banks and make them more resilient to market fluctuations.
Capital Requirements The minimum CAR was increased to 8%, with Tier I capital required to be at least 4%. Banks were also required to maintain a capital conservation buffer.
Risk Weighting System It introduced three pillars of risk management: minimum capital requirements, supervisory review, and market discipline.
Types of Assets A more comprehensive risk-weighting approach was introduced, with credit, operational, and market risks taken into account.
Applicability It applied to all banks, including domestic and internationally active ones.
Drawbacks It was criticized for being too complex and costly to implement, especially for smaller banks.

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Basel Norms UPSC 

Basel norms are an important topic for UPSC aspirants to study as it is part of the UPSC Syllabus for the Indian Economy. The topic is covered in General Studies Paper III under the sub-topic of the Indian Economy and Financial Market. Aspirants can also expect questions related to Basel norms in the Banking and Financial Awareness section of the UPSC Prelims and Mains examinations.

Understanding the Basel norms is crucial for aspirants preparing for UPSC as it helps in comprehending the regulatory framework for banks and financial institutions.

Moreover, UPSC aspirants can also benefit from studying Basel norms by enrolling in online coaching programs, such as StudyIQ UPSC Online Coaching. These coaching programs provide a comprehensive understanding of the topic and can help aspirants prepare for UPSC in a structured and efficient manner. Aspirants can also take UPSC Mock Test, which often includes questions related to Basel norms, to assess their preparation and identify areas that require further study.

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Basel Norms FAQs

What are the 3 Basel norms?

The three Basel norms are Basel I, Basel II, and Basel III.

What is Basel 1 Basel 2 and Basel 3?

Basel I, II, and III are successive versions of the Basel Accords that establish international standards for banks' capital adequacy, risk management, and liquidity management.

What are Basel norms in India?

Basel norms in India include higher capital adequacy ratios, a countercyclical buffer, liquidity coverage ratio, leverage ratio, and disclosure requirements.

Why it is called Basel norms?

The norms are called Basel norms because they were developed by the Basel Committee on Banking Supervision, a global regulatory body headquartered in Basel, Switzerland.

What are Basel 4 norms?

Basel IV is the proposed update to the Basel III norms and includes changes to risk-weighted asset calculations, the standardized approach for credit risk, and the internal ratings-based approach.

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