BASEL – III – It’s aftermath and effects

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Many of you had some doubts in BASEL – III and asked me to provide you guys the required post. So, here we are providing you the same. Hope you like the post!!



What are the
Basel-III norms?

These are
rules written by the Bank of International Settlement’s Committee on Banking
Supervision (BCBS) whose mandate is to define the reform agenda for the global
banking community as a whole. The new rule prescribes how to assess risks, and
how much capital to set aside for banks in keeping with their risk profile.

What are the
changes which have been made to the way in which capital is defined?

Going by the
new rules, the predominant component of capital is common equity and retained
earnings. The new rules restrict inclusion of items such as deferred tax
assets, mortgage-servicing rights and investments in financial institutions to
no more than 15% of the common equity component. These rules aim to improve the
quantity and quality of the capital.
What do
these new rules say?

While the
key capital ratio has been raised to 7% of risky assets, according to the new
norms, Tier-I capital that includes common equity and perpetual preferred stock
will be raised from 2-4.5% started in phases from January 2013 to be completed
by January 2015. In addition, banks will have to set aside another 2.5% as a
contingency for future stress. Banks that fail to meet the buffer would be
unable to pay dividends, though they will not be forced to raise cash.
How
different is the approach now?

The new
norms are based on renewed focus of central bankers on macro-prudential
stability. The global financial crisis following the crisis in the US sub-prime
market has prompted this change in approach. The previous set of guidelines,
popularly known as Basel II focused on macro-prudential regulation. In other
words, global regulators are now focusing on financial stability of the system
as a whole rather than micro regulation of any individual bank.
How will
these norms impact Indian banks?

 Indian banks are not likely to be impacted by
the new capital rules. The aggregate capital to risk-weighted assets ratio of
the Indian banking system stood at 13.4%, of which Tier-I capital constituted
9.3%. As such, RBI does not expect our banking system to be significantly
stretched in meeting the proposed new capital rules, both in terms of the
overall capital requirement and the quality of capital. There may be some
negative impact arising from shifting some deductions from Tier-I and Tier-II
capital to common equity.