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what is BASEL accord and what are BASEL II norms
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Answer Posted / sumit jha
BESEL NORMS…
..some prerequisite…
>Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called as default. Another term for credit risk is default risk.
>Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices. The associated market risks are:
 Equity risk, the risk that stock prices and/or the implied volatility will change.
 Interest rate risk, the risk that interest rates and/or the implied volatility will change.
 Currency risk, the risk that foreign exchange rates and/or the implied volatility will change.
 Commodity risk, the risk that commodity prices (e.g. corn, copper, crude oil) and/or implied volatility will change.
>An operational risk is, as the name suggests, a risk arising from execution of a company's business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates. It also includes other categories such as fraud risks, legal risks, physical or environmental risks.
BESEL….The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland.
BESEL I/II-
Basel accord can be regarded as the regulations for banks set by Basel Committee, these regulations are mainly to protect the interest of the depositors in a Bank. The Basel-
I accord was accountable for two risks viz, Credit Risk and Market Risk but the Basel-II accord came up with an equally important risk i.e., operational Risk. The main difference
between Basel-I accord and Basel-II accord is that Basel-! accord was not confined with the rating factor and was based on the fact "one size fits all" but Basel-II accord
mainly focuses on the rating factors of the borrowers. BESEL 1 has kept the minimum capital adequacy same for all the banks regardless of the their risk profile which means “One size fit all” approach.
BESEL-II
The first accord by the name .Basel Accord I. was established in 1988 and was implemented by 1992. It was the very first attempt to introduce the concept of minimum standards of capital adequacy. Then the second accord by the name Basel Accord II was established in 1999 with a final directive in 2003 for implementation by 2006 as Basel II Norms. Unfortunately, India could not fully implement this but, is now gearing up under the guidance from the Reserve Bank of India to implement it from 1 April, 2009.
Basel II Norms have been introduced to overcome the drawbacks of Basel I Accord. For Indian Banks, these Norms are necessary since India is and will witness increased capital flows from foreign countries and there is increasing cross-border economic & financial transactions.
FEATURES OF BASEL II NORMS:
Basel II Norms are considered as the reformed & refined form of Basel I Accord. The Basel II Norms primarily stress on 3 factors, viz. Capital Adequacy, Supervisory Review and Market discipline. The Basel Committee calls these factors as the Three Pillars to manage risks.
Pillar I: Capital Adequacy Requirements:
Under the Basel II Norms, banks should maintain a minimum capital adequacy requirement of 8% of risk assets. For India, the Reserve Bank of India has mandated maintaining of 9% minimum capital adequacy requirement. This requirement is popularly called as Capital Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR).
Pillar II: Supervisory Review:
Banks majorly encounter with 3 Risks, viz. Credit, Operational & Market Risks.
Basel II Norms under this Pillar wants to ensure that not only banks have adequate capital to support all the risks, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. The process has four key principles:
a) Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels.
b) Supervisors should review and evaluate bank's internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios.
c) Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum.
d) Supervisors should seek to intervene at an early stage to prevent capital from falling below minimum level and should require rapid remedial action if capital is not mentioned or restored.
Pillar III: Market Discipline:
Market discipline imposes banks to conduct their banking business in a safe, sound and effective manner. Mandatory disclosure requirements on capital, risk exposure (semiannually or more frequently, if appropriate) are required to be made so that market participants can assess a bank's capital adequacy. Qualitative disclosures such as risk management objectives and policies, definitions etc. may be also published.
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