Basel-III
- In 2010, Basel III recommendations were released.
- The Basel III regulations seek to increase the capital-intensiveness of most banking activities, including trading books.
- The rules concentrate on four crucial banking parameters: capital, leverage, funding, and liquidity, to foster a more resilient banking sector.
- In reaction to the financial crisis of 2008, several rules were implemented.
- Banks in industrialized economies were under-capitalized, over-leveraged, and relied more on short-term funding, necessitating the need to reinforce the system further.
- Furthermore, Basel II’s capital amount and quality requirements were deemed insufficient to handle any increased risk.
Fundamentals of Basel-III:
1. Leverage Ratio:
- As a backup to the risk-based capital requirements, Basel III included a non-risk-based leverage ratio. Banks must maintain a leverage ratio that is higher than 3%.
- Tier 1 capital is divided by a bank’s average total consolidated assets to arrive at the non-risk-based leverage ratio.
2. The Minimum Capital Needs:
- A capital to risk-weighted asset ratio of 8% was required under Basel III regulations.
- Indian scheduled commercial banks must maintain a CAR of 9% in accordance with RBI regulations.
- It is imperative that the public sector banks in India maintain a CAR of 12%.
- Banks are required to keep a capital conservation buffer of 2.5%.
- Additionally, the counter-cyclical buffer needs to remain at 0-2.5 percent.
- Banks now have until January 1, 2022, to implement the modifications initially scheduled to begin in 2013, but the deadline has been repeatedly postponed.
3. Requirements for Liquidity:
- The Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) are two liquidity ratios made available by Basel III.
- To comply with the Liquidity Coverage Ratio, banks must have enough highly liquid assets to support a 30-day stressed financing scenario as determined by the supervisors.
- The Liquidity Coverage Ratio mandate, which was first introduced in 2015 at only 60% of its stated criteria, is expected to rise by 10% per year until it is fully implemented in 2019, which is likely to happen in 2019.
- However, the Net Stable Funding Ratio (NSFR) mandates that banks continue to hold more stable funding than is necessary for a year of prolonged stress. The NSFR will begin operating in 2018 and was created to alleviate liquidity shortages.
In relation to their off-balance-sheet assets and activities, banks must maintain a stable funding profile in accordance with the Net Stable Funds Rate (NSFR). NSFR mandates that banks secure steady funding sources for their operations (reliable over the one-year horizon). The NSFR must be at least 100%. LCR thus evaluates resilience over the short term (30 days), whereas NSFR measures resilience over the medium term (1 year).
Basel III Affects Banks: Due to the cost of strengthening capital ratios, which would decrease lending, banks may increase lending rates. This will have a negative impact on the economy because investment, exports, and consumption will all decline.
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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