#OneConceptOneDay continued...
Today will take one topic that will
help u to understand the next 3 topic that I will be covering in
next 3 days.Topics are related to
Banking System.
(This topic is
a bit technical..but u have to go through it..for better understanding)
So ,the topic is "
Basel Norms"::
Background::
=>
•Banking System is backbone of any economy of the world.Priority of any nation is to grow faster.To grow faster,its banking system needs to grow faster & yet stable.
•Achieving both these simultaneouly is a tougher task.
•Banking System in the world is highly connected.A change in one corner of the world have repercussions in the other part of the world.
•Especially ,the risks that banks take in terms of loan giving & keeping asset with himself is at the focus.
•So for broader cooperation on global scale & to bring uniformity in the banking system, Basel Norms were developed.
•
Basel Committee on Banking System (BCBS) formulated Basel guidelines refer to broad supervisory standards formulated by this group of central banks.
•
Basel is the the city in
Switzerland & is
headquarter of
BIS(Bureau of International Settlement)[I am skipping more history of Basel norms...that will not be asked in Mains too...whatever I have explained above is sufficient]
*They have formulated series of norms that have to be followed by countries...
**Basel-I::
=>
1988::
BCBS introduced capital measurement system called Basel capital accord, also called as Basel 1.
Outcome::
Minimum Capital Requirement was fixed at 8% of Risk Weighted Avg (RWA).{
RWA?? => Suppose banks have given loab to such person or entity which have also issued Collaterals, then it has less risk to fail.Even if he doesn't pay back,banks can sale the collateral & get the money.
Suppose banks have given credit to such entities which are highly prone to market risks & then is very less chances of getting the loan back, then this has greater risk.
So weighed avg of all such possible loans is called as RWA}
•
India adopted Basel-I norm in
1999.
**Basel-II::
=>
2004:BCBS have came with more refined version of norms called as Basel-II norms
Outcome:
i)Banks should maintain
8% of CAR (
CAR ?= I will be covering it in upcoming days)
ii)Banks were needed to
develop and use better risk management techniques in monitoring and managing all the types of risks that is credit and increased disclosure requirements.
iii)Banks needs to
mandatarily disclose their risk exposure.*Basel II norms in
India and overseas are
yet to be fully implemented.**Basel-III:
=>
2010:: In response to 2008 Crisis ,Basel-III guidelines are issued.
Why need for
Basel-III?=>After 2008 Crisis, need was felt to further strengthen the system as
banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding.
• Also quantity and quality of capital under Basel II were deemed insufficient in managing the whole banking system of the world.
• Basel-III guildelines are focussed on 4
vital banking parameters viz. capital, leverage, funding and liquidity.
{ *
Capital- Capital req in the banks have been doubled.
*
Leverage- Leverage basically means buying assets with borrowed money to multiply the gain. This has more risks. So these guildelines put limitation on banking side.
*
Funding & liquidity- (These are simple termss just google them).Basel III puts a requirement for the
banks to maintain some liquid assets all the time.}
RBI have set
2019 as year to implement these Basel-III guidelines...
Some
challenges b4 implementation of
Basel-III norms::-
Higher Capital Req for banks-
More technology deployment-
Liquidity Crunch.So.,in
Prelims,Que.can be framed like
RWA req for Basel-I OR II ..then give 4 options.....OR simple que that Basel norms are related to what...& then 4 options..OR Basel -III norms have 4 pillars..what are they?..& combinations of different options.
In
Mains,GS3 , they can ask like Why Indian Banking system faced the crisis of NPA? (u can give these points as references) & such questions.
Join
@EconomicsforMains