Basel I, II & III Norms: An Overview

Basel I, II & III Norms: An Overview

Basel Accords or the Basel Norms are the three sequential international banking regulatory meetings through which capital requirements and risk measurements for global banks are met up. The Basel Accords are made in such a way that financial institutions have enough capital in their account to meet their obligations and sometimes also get through unexpected losses. Basel I, II & III Norms is an important topic as it has much weightage in the Banking Sector. In the article below we have provided an overview of Basel I, II & III Norms.

What are Basel Norms?

The International Banking Regulations issued by the Basel Committee on Banking Supervision (BCBS) are known as Basel Norms. The need to bring out the Basel Norms was to strengthen the International Banking System. There are certain risks associated with the Banks and Financial System as they deal with the different types of borrowers and to cope up with these risks Basel Norms or Basel Accords was set up.

Basel Committee on Banking Supervision(BCBS)

BCBS was established in 1974 by the Central Bank Governors of the Group of Ten Countries. The Basel Committee on Banking Supervision provides a forum at the global level for regular cooperation on the supervisory matters of banking. The Secretariat of the Committee is situated at the Bank for International Settlements(BIS) in Basel, Switzerland.  At present BCBS has 45 members from 28 jurisdictions comprising Central Banks and the authorities that are responsible for Banking Regulation. Member countries include Australia, Argentina, Belgium, Canada, Brazil, China, France, Hong Kong, Italy, Germany, Indonesia, India, Korea, the United States, the United Kingdom, Luxembourg, Japan, Mexico, Russia, Saudi Arabia, Switzerland, Sweden, the Netherlands, Singapore, South Africa, Turkey, and Spain.

Basel- I

Basel- I was established in 1988 and it came into implementation by 1993. Guidelines of Basel- I was adopted in India in the year 1999. Basel Accord-I introduces the concept of minimum standards of capital adequacy and mainly focuses on Credit Risk. The possibility of a loss when borrower fails to repay the loan or meet contractual obligations is termed as Credit Risk. Credit Risk refers to the risk that a lender may not receive the owed principal and interest due to which cash flows are interrupted and the cost for collection increases. The capital and structure of risk weight for banks was defined in this Basel.

Basel II

Basel II was established in 1999 with a final directive in 2003 and was finally implemented in 2006 as Basel II Norms or Basel Accord II Norms. Basel II came as the refined and reformed guidelines of Basel I accord. As per the Basel Committee on Banking Supervision Basel II is based on the three parameters.

• Capital Adequacy Ratio/CAR/CRAR- Capital Adequacy Ratio is the ratio of the bank’s capital funds to risk weighted assets which has to be maintained to buffer the risk to the bank from its risk assets.
• Supervisory Review- An institution’s capital adequacy and internal assessment process must be reviewed supervisory.
• Market Discipline- The disclosures must be effectively used to strengthen market discipline and encourage sound banking practices.

Basel III

Lehman Brothers fall down in September 2008 and even before the need for a fundamental strengthening of the Basel II framework had come up. The banking sector suffered from the financial crisis with too much leverage and there were not sufficient liquidity buffers. In 2010, Basel III guidelines came into action and this was in response to the financial crisis of 2008.