Basel-I
- In 1988, BCBS introduced the Basel Capital Accord, a capital measuring scheme.
- Credit risk accounted for almost all of its concerns.
- The capital and risk-weighting framework for banks was formed.
- The minimum capital requirement was established at 8% of risk-weighted assets (RWA).
- Assets having variable risk profiles are referred to as RWA. For instance, a secured asset would be less hazardous than a personal loan with no security.
Fundamentals of Basel-I:
Tier 1 capital and Tier 2 capital are the two kinds of capital. Because it is the primary indicator of the bank’s financial soundness, Tier 1 capital is its core capital. Paid-up capital and stated reserves, referred to as retained earnings, make up most of the core capital. Non-cumulative and non-redeemable preferred stock is also included. Since Tier 2 capital is less dependable than Tier 1, it is used as supplemental finance.
It comprises subordinate debt, preferred shares, and secret reserves. India embraced the Basel 1 principles in 1999.
Tier 1 and Tier 2 Capital:
Tier 1: This category includes a bank’s equity, reported reserves, and core capital, as shown on its financial statements.
A bank’s Tier 1 capital acts as a safety net in the event of substantial losses, enabling it to withstand pressure and continue running its business.
Tier 2: This category describes the additional capital that a bank maintains, such as secret reserves and unsecured subordinated debt instruments with a minimum original duration of five years.
Since it is more difficult to calculate precisely and more difficult to liquidate, Tier 2 capital is regarded as being less dependable than Tier 1 capital.
Basel Norms
The Basel Committee on Banking Supervision (BCBS) established the Basel Norms as the standards for international banking laws. These standards aim to harmonize international financial legislation and strengthen the global banking system. A total of 27 people from different nations, including India, make up BCBS. Basel, I, II, and III are the three guidelines the Basel Committee has released to achieve its goal. The Basel Committee on Banking Supervision series focuses on the threats to banks and the financial system. Basel-III, the most recent agreement, was approved in November 2010. Basel III mandates a minimum level of common equity and a minimum liquidity ratio for banks. Its administrative headquarters are in the Basel, Switzerland-based headquarters of the Bank of International Settlements (BIS). Thus, the Basel norms’ name.
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