Basel II and beyond: Current status across the world.
Table of Contents
Need for the study2
The Need for Regulation2
Goals and Tools for Bank Regulation and Supervision3
The Basel I Accord4
Basel Committee on Banking Supervision (BCBS)4
1988 Basel Accord5
1996 Amendment to include Market Risk6
Evolution of Basel Committee Initiatives6
The New Accord (Basel II)7
The Need for Basel II8
PILLAR I: Minimum Capital Requirements8
PILLAR 2: Supervisory Review Process12
Pillar 3: Market Discipline13
Criticism of Basel II13
Challenges for developing countries16
Global survey by Financial Stability Institute (FSI)19
Impact of the financial crisis on Basel II implementation plans19
Global results of the survey20
Basel II in China and India21
The Basel Accords refer to the banking supervision Accords (recommendations on banking laws and regulations) -- Basel I and Basel II issued and Basel III under development -- by the Basel Committee on Banking Supervision (BCBS). They are called the Basel Accords as the BCBS maintains its secretariat at the Bank of International Settlements in Basel, Switzerland and the committee normally meets there.
The Basel I Capital Accord, published in 1988, represented a major breakthrough in the international convergence of supervisory regulations concerning capital adequacy. Its main objectives were to promote the soundness and stability of the international banking system and to ensure a level playing field for internationally active banks. Even though it was originally intended solely for internationally active banks in G-10 countries, it was eventually recognized as a global standard and adopted by over 120 countries around the world.
Need for the study
Basel Accord has become a worldwide excepted norm across the banking industry. Basel norm compliance has become almost a compulsion for any bank that intends to set up its branch operation in other country than its own home country. Even the country governments and Regulators are making it a part of their regulations for banking industry.
Hence it becomes of prime importance to study Basel Accord and latest developments in it.
The Need for Regulation
Banking is one of the most heavily regulated businesses since it is a very highly leveraged (high debt-equity ratio or low capital-assets ratio) industry. In fact, it is an irony that banks, which constantly judge their borrowers on debt-equity ratio, have themselves a debt-equity ratio far too adverse than their borrowers! In simple words, they earn by taking risk on their creditors’ money rather than shareholders’ money. And since it is not their money (shareholders’ stake) on the block, their appetite for risk needs to be controlled.
Goals and Tools for Bank Regulation and Supervision
The main goal of all regulators is the stability of the banking system. However, regulators cannot be concerned solely with the safety of the banking system, for if that was the only purpose, it would impose a narrow banking system, in which checkable deposits are fully backed by absolutely safe assets – in the extreme, currency. Coexistent with this primary concern is the need to ensure that the financial system operates efficiently. As we have seen, banks need to take risks to be in business despite a probability of failure. The twin supervisory or regulatory goals of stability and efficiency of the financial system often seem to pull in opposite directions and there is much debate raging on the nature and extent of the trade-off between the two. Though very interesting, it is outside the scope of this report to elaborate upon. Instead, let us take a look at the list of some...