Historical Background of the Basel Committee

How do Basel Norms work?

The Basel accord is the name given to a group of BCBS agreements that mainly deal with risks to banks and the financial system. The agreement sets this as its primary objective to ensure that financial institutions have enough capital to meet obligations and absorb unforeseen losses. India has agreed to the Basel accords for the banking system....

Why Basel Norms are Essential?

Lending to borrowers that bear their risks exposes banks to various risks and defaults. Banks lend money obtained from the market and people’s deposits, as a result of which they occasionally experience losses. As a result, banks must set aside a specific amount of capital as protection against the risk of non-recovery to handle such situations....

Historical Background of the Basel Committee:

At the end of 1974, following significant disruptions in the global currency and banking markets, the central bank governors of the Group of Ten countries founded the Basel Committee, formerly known as the Committee on Banking Regulations and Supervisory Practices. The Basel Committee now has 45 institutions from 28 jurisdictions as members, up from the original G10 group when it was founded. The Basel Committee established a number of international standards for bank regulation beginning with the Basel Concordat, first published in 1975 and revised several times since. Of particular note are its landmark publications of the capital adequacy accords, commonly referred to as Basel I, Basel II, and most recently, Basel III. The Committee and its oversight body created a reform program in response to the financial crisis of 2008 to address the lessons learned from the crisis and carry out the requirements for banking sector changes set forward by the G20 at their 2009 Pittsburgh summit. Basel III refers to the new international regulations that address both firm-specific and more general systemic risks....

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....

Basel-II:

Basel II guidelines, which were seen as improved and revised versions of the Basel I agreement,  In June 2004, the Basel II Accord was released. It is being created to establish global bank regulation norms and lower risk in the worldwide banking system. Before Basel II could take full effect, the financial crisis of 2007–2008 interfered....

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....

Implementation in India:

Basel-III implementation in India had to be completed by March 2019. The new date is March 2020. The RBI choose to delay the implementation of Basel standards by another six months due to the coronavirus outbreak. Bank capital requirements, such as those related to NPAs, are reduced as a result of Basel III’s time extension. This extension will affect how foreign players see Indian banks and the central bank....

Conclusion:

These regulations have been put into effect nationwide by the RBI. It was implemented to align bank compliance and regulation procedures with other major international banks. It guarantees that Indian banks are well-positioned to handle any financial risk. By making the banking sector more resilient and increasing the capacity and sustainability of delivering financial services to the real economy, the Basel Committee’s post-crisis reforms have contributed to improving financial stability....