banking and legal framework

Banking and Banking and Legal Legal

FrameworksFrameworks

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ContentContent

Banking Regulation Act-1949.

Reserve Bank of India Act- 1934.

Basel I, II, III.

Risk faced by Bank.

Capital Adequacy Ratio.

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It empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India".

Framework for regulation and supervision of commercial banking activity.

In 1965 the act was amended to cover cooperatives banks.

The emphasis of supervision has shifted from CAMELS to more risk based approach.

Banking Regulation Act- Banking Regulation Act- 19491949

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Banking Regulation Act- 1949 defines a banking company as “a company which transact the business of banking in India”

Sec 7 of Banking Regulation Act prohibits a company other than banking company from using the word “bank”, “banker”, “banking”, or “banking company”.

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cont...cont...

Reserve Bank Of Reserve Bank Of India Act-1934India Act-1934

RBI was established on 1st April 1935.

RBI was originally Privately owned.

RBI was Nationalised in Year 1949.

Central Office was initially established

in Calcutta and moved to Mumbai in

1937.04/08/23 5

Structure of RBIStructure of RBI RBI Have 20 Directors :

• The Governor• Four Deputy Governors• One Govt. Official from Ministry of Finance.• Ten Nominated Director, nominated by Govt.• Four Directors to represent Headquarters at

Mumbai, Kolkata, Chennai & New Delhi. Appointed/ Nominated for period of Four Years. RBI has Head office in Mumbai & other 22

regional offices.

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Function of RBIFunction of RBI

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1. Bank of Issue2. Banker to Government3. Bankers' Bank and Lender of the Last

Resort4. Controller of Credit5. Custodian of Foreign Reserves6. Promotional functions

Basel NormsBasel Norms

Basel guidelines refer to broad supervisory standards.

Currently there are 27 member nations in the committee.

The set of agreement by the BCBS are called Basel accord.

It mainly focuses on risks to banks and the financial system.

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Basel Norms cont...Basel Norms cont...

The purpose of the accord is to ensure that financial institutions have enough capital.

India has accepted Basel accords for the banking system.

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Establishment of Establishment of Basel CommitteeBasel Committee

It was formed in response to the messy liquidation of a Cologne-based bank in 1974.

 On 26 June 1974, a number of banks had released Deutsche Mark to the Bank Herstatt in exchange for dollar.

Due differences in the time zones, there was a lag in the dollar payment.

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Cont...Cont...

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This incident prompted G-10 nation to form Basel committee on banking supervision.

Basel I, II, IIIBasel I, II, III

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Basel IBasel I

In 1988, BCBS introduced capital measurement system called as Basel 1.

It focused almost entirely on credit risk. It defined capital and structure of risk

weights Assets (RWA)for banks. India adopted Basel 1 guidelines in

1999.

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Cont...Cont...This classification system grouped a

bank's assets into five risk categories:

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Risk WeightsRisk Weights Asset ClassificationAsset Classification

0% Cash, government and debt and any OECD government debt

0%, 10%, 20% or 50%

Public sector debt

20% Development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (under one year maturity) and non-OECD public sector debt, cash in collection

50% Residential mortgages

100% private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and equipment, capital instruments issued at other banks

Cont...Cont...

Calculation of RWA

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Assets Category

Risk Weight

Capital ratio

Amount RWA Minimum Capital

Requirement

Treasury Bond

0% 8% $1000 $0 $0

Municipal Bond

20% 8% $1000 $200 $16

Residential

Mortgage

50% 8% $1000 $500 $40

Unsecured Loan

100% 8% $1000 $1000 $80

Pitfalls of Basel IPitfalls of Basel I

Limited differentiation of credit risk.Static measure of default risk. No recognition of term-structure of

credit risk .Simplified calculation of potential

future counterparty risk

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Basel IIBasel II

In June ’04, Basel II guidelines were published by BCBS.

Guidelines were based on three parameters, which the committee calls it as pillars.

– Capital Adequacy Requirements– Supervisory Review– Market Discipline

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ChangesChanges

Banks are required to maintain a minimum capital to Risk-weighted assets ratio (CRAR) of 9% on an ongoing basis.

Two approaches for computing RWAs for Credit Risk:

– Standardized Approach: – Foundational Internal Rating

Approach:

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Cont...Cont...

Operational & Market RiskThree approaches – Basic Indicator Approach – Standardized Approach – Advanced Measurement Approach

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Basel II-3PillarsBasel II-3Pillars

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Basel IIIBasel III

In 2010, Basel III guidelines were released.These guidelines were introduced in

response to the financial crisis of 2008.Basel III norms aim at making most

banking activities such as their trading book activities more capital-intensive.

The guidelines aim to promote resilient banking system by focusing on four vital banking parameters.

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Cont...Cont...

The minimum amount of equity, as a percentage of assets, will increase from 2% to 4.5%

There is also an additional 2.5% "buffer" requirement.

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Risks faced by BanksRisks faced by Banks

Credit risk. Country and transfer risk. Interest rate risk.Liquidity risk.Operational risk.Settlement Risk.

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Capital Adequacy RatioCapital Adequacy Ratio

Definition: Capital Adequacy Ratio (CAR) is

defined as the ratio of bank's capital to its risk assets. Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR).

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Cont...Cont...

In1992-93 banks are required to have a minimum capital of 8%.

In 1998-99. the CRAR to be raised to 10%. Minimum requirements of capital fund in

India: Existing Banks 09 % New Private Sector Banks 10 %Banks undertaking Insurance business 10 %Local Area Banks 15%

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Cont...Cont...

Concepts of Capital Adequacy Norms:

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Thank YouThank You

Presented By:Presented By:

Bhavini Patel - 27Bhavini Patel - 27

& &

Shradha Pereira - 32Shradha Pereira - 3204/08/23 27