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Bank for International

Settlements

BaselI

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Bank for InternationalSettlements Established: May 1930 at Basel, Switzerland,

after World War I.

Founding Members: United Kingdom, France,Italy, Japan, Belgium, the United States and

Germany. Function: Handling the collection,

administration and distribution of annualreparations (~ $8bn over 59 years) from

Germany to the Allies. Choice of Switzerland due to its position as

an independent, neutral country; offeringleast exposure to undue influence from any of

the major powers.

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Functions

Bank for Central Banks andInternational Organizations.

Forum for discussion and cooperation

among central banks and the financialcommunity.

Promoting monetary and financialstability.

Conducting research on policy issuesconfronting central banks and financialsupervisory authorities.

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Basel Committee on BankingSupervision (BCBS) Originally established by Central Bank

Governors of G-10 nations in 1974.

Currently has members from 27 nations(including India).

Formulates broad supervisory standards &guidelines, and recommends them toindividual authorities. Accordingly, itencourages international convergencetowards common supervisory approaches &standards.

Committee has no formal supranationalsupervisory authority & its conclusions do not

carry legal force.

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BCBS Publications

1988

Basel I

2004BaselII

2010BaselIII

1988 - International Convergence of CapitalMeasurement and Capital Standards.

2004 - Basel II: International Convergence of

Capital Measurement and Capital Standards: ARevised Framework.

2010 - Basel III: A Global regulatoryframework for more resilient banks and

banking systems.

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Bank for International

Settlements

BaselI

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Basel I

Consultative document prepared byG-10 nations in 1988.

Aimed at i) strengthening the

soundness and stability ofinternational banks ii) diminishingcompetitive inequality among banks

Designed to establish minimum levels

of capital for internationally activebanks.

To be applied to banks on a

consolidated basis

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The Framework

Capital forsafeguarding againstrisk

Risk Weighting the

banks loan book forquantifying risk

Target Standard Ratio

to stipulate minimum

level of Capitalrequired relative toRisk

Capital RWAs

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Constituents of Capital

Tier I- Core Capital

Equity Capital

Disclosed Reserves

Tier II- Supplementary Capital

Undisclosed Reserves

Revaluation Reserves

a) Formal revaluation

b) Latent Revaluation (55%

discount) General Provisions

Hybrid Debt Capital Instruments

Subordinated Term Debt (Limitedto 50% of Tier I)

Tier II

Supplementary Capital(50%)

Tier I

Core Capital(50%)

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Deductions from Capital

Goodwill deducted from Tier I Capital Investment in unconsolidated BFSI

subsidiaries deducted from Total

Capital. Investment in capital of other banks

and financial institutions- At the

discretion of national authorities.

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Risk Weighting

Direct Credit Exposures: Weighted RiskWeight Ratio used to relate capital todifferent categories of assets, weightedaccording to level of riskiness

Contingent Exposures:Step I- Application of Credit ConversionFactor (CCF) to account for credit risk ofoff-balance sheet exposure (trade related

transactions/guarantees/derivatives)Step II- Weighted Risk Weight Ratio torelate capital to riskiness of exposure

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Risk Weights (Direct CreditExposure)

0%

Cash & CashEquivalents

Claims on CentralGovt. & CentralBank of home

country

Direct claims onOECD CentralGovts. & Banks

20%

Claims on Banksinc. in OECD

Claims on MDBs

Claims on banksoutside OECD,

with loans upto 1year

50%

Housing Loansfully secured by

residentialproperty

100%

Claims on Pvt.

Sector

Claims on non-OECD banks, withloans above 1 year

Claims on non-OECD central

Govts.

Premises, Plant &Equipment, other

Fixed Assets

All other Assets

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CCF (Contingent Exposure)

0%

Credit Lineswith maturityupto 1 year,

which can beunconditionallycancelled.

20%

Short-term selfliquidating

trade credits(eg. LCs)

50%

Transactionrelatedcontingentitems (eg.

PerformanceBank

Guarantees)

Credit Lineswith maturityabove 1 year

100%

Direct CreditSubstitutes

(eg. FinancialBank

Guarantees)

Sale &Repurchaseagreements,where Credit

Risk is with theBank.

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CCF (Derivatives)

Choice between Current ExposureMethod or Original Exposure Method

CEM = Total Replacement Cost (MTM

value of contracts) + Potential FutureExposure (related to notional principalamount and residual maturity)

ResidualMaturity

Interest RateContracts

Exchange RateContracts

< 1 year Nil 1.0%

> 1 year 0.5% 5.0%

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Successes

Implementation of the framework byall Basel committee members (exceptJapan) by 1992.

Implementation by all countries(including India) by 1999.

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Failures

Coverage of only Credit Risk Regulatory Capital arbitrage by some

banks, resulting in higher risk

Method I- Securitization of corporateloans and sale of least risky assets.Resultant portfolio is more risky,

however requires lesser capitalaccording to Basel I

Method IIRollingforward short run

non-OECD bank debtinstead of long

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Thank You

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References

BIS Website (www.bis.org) Basel I Accord

Basel I, Basel II, and Emerging

Markets: A Nontechnical Analysis byBryan J Balin

Wikipedia

http://www.bis.org/http://www.bis.org/