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Economy 21: Basel Norms

BIS & BCBS
International banking supervision foundations.
  • BIS: Bank for International Settlement.
  • It is the oldest financial institution in the world.
  • Formed around the 1930s.
  • Headquarters: Basel, Switzerland.
  • New Name: BCBS (Basel Committee on Banking Supervision).
Types of Risk
Risks identified under the Basel framework.

1. Credit Risk

Risk associated with loans.

2. Market Risk

Risk on liquid assets (e.g. gold, shares).

3. Operational Risk

Risk associated with data.

Types of Capital
Capital tiers maintained by banks to ensure stability.

Tier 1 Capital

Used for the day-to-day operations of banks, such as maintaining CRR, SLR, etc.

Tier 2 Capital

This is the money which a bank has saved to recover losses.

The Basel Norms (Accords)
Evolution of global banking standards.

1. Basel 1

  • Introduced in 1988; India adopted in 1999.
  • Main focus: Credit Risk.
  • Introduced CAR (Capital Adequacy Requirement).
    • CAR = (Tier 1 + Tier 2) / Risk Weighted Asset
  • Suggested: 8% | In India: 9% (minimum).

2. Basel 2

  • Introduced in 2004; India adopted in 2009.
  • Focus: All 3 types of risk (Credit, Market, Operational).
  • Supervisory Review: Closer monitoring by regulators.
  • Market Discipline: Timely report submission to central banks.

3. Basel 3

  • Introduced in 2010.
  • Deadline to join: 2019 (later extended to 2020).
  • Introduced liquidity ratios:
    • LCR (Liquidity Coverage Ratio): High-quality liquid assets for 30 days.
    • NSFR (Net Stable Funding Ratio): Ensuring stable cash/funding for 1 year.
Practice Quiz

What is the full form of BIS in the context of international banking?

Bureau of Indian Standards
Bank for International Settlement
Bank of Industrial Solvency
Board for Integrated Supervision

What is India's minimum Capital Adequacy Requirement (CAR) as set by the RBI?

8%
9%
10%
12%

Under Basel 3, the 'LCR' (Liquid Coverage Ratio) requires banks to hold liquid assets for how many days?

15 days
30 days
60 days
90 days

Which Basel norm introduced the Net Stable Funding Ratio (NSFR) to ensure stable funding for one year?

Basel 1
Basel 2
Basel 3
Basel 4

Which Basel norm first introduced the concept of the Capital Adequacy Requirement (CAR)?

Basel 1
Basel 2
Basel 3
Basel 4