Basel I and Ii

In: Business and Management

Submitted By paglababa
Words 3956
Pages 16
ICRA Indonesia Comment
June 2013

Minimum Capital Provisioning for Credit Risk – a Comparative Study of Basel I and Basel II
Contact:
Pradnya Desai Manager– Rating Analyst +62 21 576 1516 desai.pradnya@icraindonesia.com Drafted in 1988 and 2004 respectively, Basel I and II have, through quantitative and technical benchmarks, helped develop a level playing field in the banking

The “Basel Committee on Banking Supervision” (BCBS) is comprised of the central banks and regulatory authorities of mainly the G20 countries (including Indonesia) and other leading nations. The committee issues broad guidelines and standards to ensure best practices in the banking supervision and risk management. (Source: www.bis.org)

supervision, regulation and capital adequacy standards across the signatory nations. As of today, more than 100 countries have implemented Basel I and around 112 countries are implementing Basel II (Source: Wikipedia, Basel committee on banking supervision survey, 2010). Basel II generated more interest on account of the multitude of financial crises that the world economy faced during the 1990s and early 2000s. Further, its implementation gained momentum among the emerging economies after the 2008 crisis. While many countries have already commenced Basel III (drafted in 2010) implementation, Indonesia is yet to finalise the norms on the subject. Basel III while relevant at a future date will not be implemented in the near future and hence this article has confined itself to Basel II. This article limits itself to exploring the benefits of adapting Basel II guidelines over Basel I with respect to only the ‘minimum capital requirement’, which is one among the three pillars of Basel II. In particular, its scope within ‘minimum capital requirement norms’, is limited to credit risk for…...

Similar Documents

Bipolar Disorder (Types I & Ii)

...Bipolar Disorder (Types I & II) – A General Overview Clinical Procedures (MEA1206C) Rhonda M. Wellde Keiser University Melbourne, Florida September 18th, 2012 I decided to write this month’s written report on Bipolar Disorder, as my mother was diagnosed with Bipolar 1 when I was a child. My family fought through the many challenges and fears that came with seeing someone you love battle what she called “demons” in her head. We constantly had to adjust to her moods, check to make sure she was taking her prescribed medications, and at times, we even fought to keep her alive and well. Today, I have a great interest in Mental Health and because this disorder has had such an impact on my life, I want to share with you some facts and information about this serious brain illness. Bipolar disorder (also known as manic depression) is a treatable psychological illness marked by extreme changes in mood, thought, energy, and behavior. The lifelong prevalence of bipolar disorder in the United States has been noted to range from 1% to 1.6% of the population over the age of 18 in any given year. It affects both men and women at the same rate with the average onset age being in the early to mid-twenties (Calabrese, JR. Overview of patient care issues and treatment in bipolar spectrum and bipolar II disorder. J Clin Psychiatry, June 2008; 69(6):e18). People with bipolar disorder talk about experiencing “highs” (mania) and “lows” (depression); these mood swings can be......

Words: 1662 - Pages: 7

Basel

...BASEL NORMS – BOON OR BANE? BY Pallabi ROY (PGDMB13/035) PRITAM SATHPATY (PGDMB13/077) SAGAR CHoUDHARY (PGDMB13/081) SHERIN MATHEWS (PGDMB13/049) SOHINI BANERJEE (PGDMB13/052) TUSHAR SHARMA (PGDMB13/086) table of contents TOPIC PAGE NO. 1. INTRODUCTION 1 2. Importance of Regulation of Bank Capital 2 3. BCBS : A Historical Background 3 4. BASEL I ACCORD 4 I. SALIENT FEATURES 5 II. ADVANTAGES OF BASEL I 9 III. SHORTCOMINGS OF BASEL I 11 5. baSEL II 13 I. from basel i to basel ii - the journey continues 13 II. OBJECTIVES 15 III. THE ACCORD IN OPERATION 15 IV. IMPACT OF BASEL II ON INDIA 26 a. IMPACT ON THE INDIAN BANKING SYSTEM 26 b. POSITIVE IMPACT 27 c. NEGATIVE IMPACT 29 V. Basel II and the global financial crisis 30 6. BASEL III 32 I. INTRODUCTION 32 II. OBJECTIVES 32 III. CHANGES MADE IN THE BASEL ACCORD 33 IV. COMPARISON OF CAPITAL REQUIREMENTS UNDER 39 BASEL II AND BASEL III V. macroeconomic impact of basel iii 40 A. Impact on Individual Banks 40 B. IMPACT ON THE FINANCIAL SYSTEM 40 C. impact of basel iii on the indian 42 banking system VI. RBI GUIDELINES 44 VII. CONCERNS WITH BASEL III 45 7. CONCLUSION ` 50 Introduction Banks......

Words: 12833 - Pages: 52

Basel

...BASEL III NORMS AND INDIAN BANKING: ASSESSMENT AND EMERGING CHALLENGES C.S.Balasubramaniam Professor, Babasaheb Gawde Institute of Management Studies, Mumbai Email: balacs2001@yahoo.co.in ABSTRACT Banking operations worldwide have undergone phenomenal changes in the last two decades since 1990s. Financial liberalization and technological innovations have created new and complex financial instruments/products have increased their role and turnover in financial markets and have rendered banking operations vulnerable to a variety of risks. The financial crisis episodes surfaced since 2006 have highlighted this paradox to a number of central banks operating in different countries and RBI and Indian banking sector is no exception to this phenomenon. Basel framework has been drawn by Bank for International Settlements (BIS) in consultation with supervisory authorities of banking sector in fifteen emerging market countries with the basic objective of advocating codes of bank supervision and promoting financial stability amidst economic crises. This research paper is divided in three parts .The opening part attempts to briefly describe the changes in the banking scenario since 1991 reforms and the necessity of introducing Basel III to the Indian Banking sector. Part II presents the Basel standards framework and explains why the transition from Basel II to Basel III norms has become necessary to bring in measures and safety standards which would equip the banks to become more......

Words: 5175 - Pages: 21

Business Analysis I, Ii & Iii

...Business Analysis I, II & III Stephanie Upchurch MGT/521 June 11, 2011 Anthony Manzanetti Business Analysis I, II & III Part I of the business analysis will review the outcomes of the SWOT analysis conducted for Ford Motor Company. The SWOT analysis will look at the strengths, weaknesses, opportunity, and the threats that Ford Motor faces. Next, part II of the business analysis will review Fords income statement, balance sheet and cash flow to determine the financial health of the company. Last, part III of the business analysis will review the strategic initiatives of Ford Motor Company relating to the organizational and operational adaptations to the changing automobile market. SWOT Analysis The reduced availability of fuel and the economic distress of Ford suppliers place the company in potential risk. The world has experienced great woes in regard to fuel availability. Events beyond car manufactures control have caused consumers to take a second look at the way they purchase automobiles. As gas prices increase consumers seek price effective ways to travel and transport goods. SUV’s, V-8 engine cars and other gas guzzling vehicles abate consumer purchases. Ford must combat the potential risk of consumer purchase decline by producing fuel efficient vehicles while making up profit losses in the slump of sales in major Ford models such as the Expedition, Explore and the F-150, super Duty and Ranger. The following will review the outcomes of the......

Words: 4531 - Pages: 19

Basel (I Ii Iii)

...THE BASEL CAPITAL ACCORDS BY JOE LARSON APRIL 2011 I. Introduction Banks are a vital part of a nation’s economy. In their traditional role as financial intermediaries, banks serve to meet the demand of those who need funding. As such, banks make it possible for people to buy homes and for businesses to expand. Banks therefore facilitate spending and investment, which fuel growth in the economy. However, despite their important role in the economy, banks are nevertheless susceptible to failure. Banks, like any other business, can go bankrupt. However, unlike most other businesses, the failure of banks, especially very large ones, can have far-reaching implications. As we saw during the Great Depression and, most recently, during the global financial crisis and the ensuing recession, the health of the bank system (or lack thereof) can trigger economic calamities affecting millions of people. Consequently, it is imperative that banks operate in a safe and sound manner to avoid failure. One way to ensure this is for governments to provide diligent regulation of banks. Yet, with the advent of globalization, banking activities are no longer confined to the borders of any individual country. With cross-border banking activities rapidly increasing, the need for international cooperation in bank regulation has likewise increased. Ready to meet this need is the Basel Committee on Bank Supervision (BCBS). In its role as the international advisory authority on bank regulation, the......

Words: 9857 - Pages: 40

Type I and Type Ii Errors

...“Researchers generally believe that the consequence of making a Type I error are more serious than those associated with a Type II error” (Cozby, 2009, 259). There are a couple of statistical power issues that may arise, 1) a Type I error or 2) a Type II error. A Type I error occurs when the null hypothesis, although true, gets rejected by the researcher whereas a Type II error occurs when the null hypothesis is accepted, but is false. It is better for researchers to obtain a Type II error because a Type I error would mislead those who are reading about these studies or experiments. Type II errors are viewed as less severe than Type I. Factors that might influence statistical power include: choosing a significance level. Significance levels such as: 05 and .01 are commonly used among researchers. According to Cozby (2009), “The significance level chosen by the researcher usually is dependent on the consequence of making a Type I error versus a Type II error” (pg. 259). Random errors usually carry a lower significance level than those previously mentioned, however “a meaningful result is more likely to be overlooked when the significance level is very low” (Cozby, 2009, pg. 260). Aside from choosing a significance level, a Type II error could be due to a small sample size or a small effect size. If the sample size is too small there is a possibility that no relationship may be determined and if there is a relationship, it may be easily overlooked. The problem with a small......

Words: 340 - Pages: 2

Counter Party Credit Rating Under Basel Ii-a Challenge for Finance Managers

...Counter Party Credit Rating Under Basel II-A Challenge for Finance Managers 1 WELCOME Counter Party Credit Rating Under Basel IIA Challenge for Finance Managers 2 Discussion Summary 1. 2. 3. 4. Basel Vs. Risk Management BaselBasel-II Road Map and Objectives BB Guideline of Basel-II implementation BaselCounter Party Rating by ECAI in determining Capital Adequacy of Corporate 5. How to face ECAI by counter parties for good rating 6. Question and Answer 3 Basel Vs. Risk Management • Basel from the view point of Risk Management • Relating to Capital Adequacy of Banks • Reflecting Risk management in Operation of Banks/FIs 4 Risk Management in Banks- Why? © Banks are highly leveraged. © Bank Directors and Senior Management are the agent of shareholders. © International survey reveals that the the Bank Management does not adequately consider the risk management information in strategic decision making. 5 CEO and Directors of Financial Institutions are currently facing … Two Major Challenges 6 Two Challenges First v Creation of Value for the Shareholders v Need to deliver ever increasing returns as per the Expectation of the shareholders Second Keep the Capital without Erosion 7 First Challenge Senior management believes that Superior Risk Management can create value to the shareholders But not Sure - HOW. 84% of the managers believe that the risk management can improve price earning ratios and reduce cost of capital which......

Words: 7448 - Pages: 30

Basel Ii Implemenatation

...Research Title Basel II Capital Accord and implementation implications in Albania Prepared: Elda Lila Mentor : Professor William Handorf, Ph.D., July 2007 Abstract: Basel II Capital Accord and implementation implications in Albania 2 Abstract: Basel II Capital Accord and implementation implications in Albania 2 I. What is New Basel Capital Accord and its Evolution 4 II. Adoption of Basel II 5 BCBS Countries 5 In Other Countries 6 Banking Supervision Improvement Priorities 6 III. History of Banking Supervision in Albania (Banking System in Albania and Supervisory Process. 7 IV. Three Pillars of Basel II and the implications related to the implementation in Albania: 10 1.Pillar 1 – Capital Defined 11 1.1 Pillar 1 – Credit Risk 11 1.2 Pillar 1 – Market Risk 15 1.3 Pillar 1 – Operational Risk 16 2. Pillar 2 – The Supervisory Review Process 16 3. Pillar 3 – Market Disclosure 18 V. Reference List 21 Abstract: Basel II Capital Accord and implementation implications in Albania I. The first part is concentrated in what is new Basel Capital Accord and its Evolution. Supervisors have long sought to ensure that banks maintain adequate capital to cover all risks. In 1988, the Basel Committee on Banking Supervision agreed the 'International Convergence of Capital Measurement and Capital Standards', more commonly known as the Basel Capital Accord which in most countries is fully......

Words: 4572 - Pages: 19

Is Basel Iii a Better Support to Islamic Banks Than Basel Ii?

...Is Basel III a better support to Islamic banks than Basel II? International Interdisciplinary Conference On Changes, Challenges and Consequences In Commerce, Engineering, Technology and Social Science. Institute of Business Management and Research, Chakan & Choice Institute of Management Studies and Research, pune, 15th March, 2014. Dr. Atmaram palnitkar Research Guide& Principal of Dayanand College OF Commerce, Latur. palnitkarav@rediffmail.com&9423347478 Abdul-Jabbar Qasem Ali Al-badaani Research Scholar of Com and Magt Sci, SRTM University, Nanded. Amaf3600@gmail.com&7709670130 ------------------------------------------------- ------------------------------------------------- ABSTRACT Banking activities involve many risks calculated and otherwise. Banks have to take appropriate measures and require management of their capital and credit and implementation procedures in keeping with the best international practices, to mitigate potential losses and avoid projected pitfalls. In view of the recent financial crisis, due to wrong management or improper implementation as well as the collapse of large economies has had a cascading effect all round the world in the form of collapses of famous institutions and banks, and thus arose a decision to have a better financial control in the form of Basel I to be later followed by Basel II and Basel III. Thus a new culture in financial controls and risk management has arisen to safeguard the banking...

Words: 3374 - Pages: 14

Basel

...Basel II to Basel III: Changes and Requirements Hesham Hamdy Chief Risk Officer, Arab International Bank Nairobi, 7-8 March 2012 Basel; what is it? • A New Standard for the Measurement of Risks in Banks, and for the Allocation of Capital to cover those risks, published by the Basel Committee of G10 Central Banks. • What Does Basel Committee Do? - Acts as Think-Tank for banking regulators - Issues guidance on best practice for banks - Standards accepted worldwide - Generally incorporated in national banking regulations Basel I • Basel I was the round of deliberations by central banks from around the world, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks. This was known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992 . • Basel I primarily focused on credit risk. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Basel I (continued) • Banks with international presence were required to hold capital equal to 8 % of the risk-weighted assets. • Basel I was then widely viewed as outmoded because the world has changed as financial corporations, financial innovation and risk management have developed. Therefore, a more comprehensive set......

Words: 3834 - Pages: 16

Besel I Ii Iii

...large ones, can have far-reaching implications. As we saw during the Great Depression and, most recently, during the global financial crisis and the ensuing recession, the health of the bank system (or lack thereof) can trigger economic calamities affecting millions of people. Consequently, it is imperative that banks operate in a safe and sound manner to avoid failure. One way to ensure this is for governments to provide diligent regulation of banks. Yet, with the advent of globalization, banking activities are no longer confined to the borders of any individual country. With cross-border banking activities rapidly increasing, the need for international cooperation in bank regulation has likewise increased. Ready to meet this need is the Basel Committee on Bank Supervision (BCBS). In its role as the international advisory authority on bank regulation, the BCBS has promulgated guidance on issues critical to ensuring health in the banking systems across the world. One such issue, and one that played an important role in the recent global financial crisis, is the regulation of bank capital. Addressing this issue has been an ongoing process for the BCBS over the past twenty...

Words: 279 - Pages: 2

Cfp Learning Modules I Ii Iii and Iv

...E-LEARNING Módulo I Introdução Links Matéria Duração http://fkpartners.na4.acrobat.com/p84084468/ 00:34:25 I Matemática Financeira (Aula 1) http://fkpartners.na4.acrobat.com/p87231027/ 00:47:25 I I Matemática Financeira (Aula 2) Matemática Financeira (Aula 3) http://fkpartners.na4.acrobat.com/p55206824/ http://fkpartners.na4.acrobat.com/p32119248/ 00:24:26 00:59:45 I Macroeconomia (Aula 1) http://fkpartners.na4.acrobat.com/p50483949/ 00:47:41 I I Macroeconomia (Aula 2) Investimentos no exterior (Aula 1) http://fkpartners.na4.acrobat.com/p73917224/ http://fkpartners.na4.acrobat.com/p35989152/ 00:38:53 00:12:49 I Investimentos no exterior (Aula 2) http://fkpartners.na4.acrobat.com/p67253279/ 00:34:19 I I Investimentos no exterior (Aula 3) Tributação (Aula 1) http://fkpartners.na4.acrobat.com/p16724823/ http://fkpartners.na4.acrobat.com/p60928642/ 00:23:28 00:01:34 I Tributação (Aula 2) http://fkpartners.na4.acrobat.com/p91384552/ 00:00:30 I I Tributação (Aula 3) Renda Fixa (Aula 1) http://fkpartners.na4.acrobat.com/p56791093/ http://fkpartners.na4.acrobat.com/p40053647/ 00:00:28 00:27:42 I Renda Fixa (Aula 2) http://fkpartners.na4.acrobat.com/p13219963/ 00:41:53 I I Renda Fixa (Aula 2 e 3) Renda Variável (Aula......

Words: 699 - Pages: 3

Basel Ii

...| Basel Consultative Group | European Banking Authority | European Commission | International Monetary Fund |   |   | Secretariat |   | Bank for International Settlements | 7.0 Appendix [Appendix (A): Basel Committee Membership, source: Bank for International Settlements (n.d.)] Risk Weight | Asset Class | 0% | Cash and gold held in bank.Obligation on OECD governments and U.S. treasuries | 20% | Securities issued by U.S. government agenciesClaims on OECD banks.Claims on municipalities. | 50% | Residential mortgages. | 100% | All other claims such as corporate bonds, less-developed countries’ debt, claims on non-OECD banks, equities, real estate, plant, and equipment. | [Appendix (B) Basel I classification of risk weights on balance sheet assets] Asset Category | Risk Weight | Capital Ratio | Amount | RWA | Minimal Capital Requirement | Treasury Bond | 0% | 8% | $10,000 | $0 | $0 | Municipal Bond | 20% | 8% | $10,000 | $2,000 | $160 | Residential Mortgage | 50% | 8% | $10,000 | $5,000 | $400 | Unsecured Loan | 100% | 8% | $10,000 | $10,000 | $800 | [Appendix (C) Example of the application of Basel I] [Appendix (D): Global Implementation Timelines, source: Yetis, 2008) 7.0 Reference List Alessi, C. (2012) The Basel Committee on Banking Supervision [Online]. Retrieved from: http://www.cfr.org/banks-and-banking/basel-committee-banking-supervision/p28694 [Accessed 8 March 2016]. Bank for International Settlements (n.d.) Basel......

Words: 1869 - Pages: 8

What Is Basel Ii

...WHAT IS BASEL II? Basel ii is a framework, and the standards it contains have been endorsed by the Central Bank Governors and Heads of Banking Supervision of the Group of Ten countries. It presents the outcome of the Basel Committee on Banking Supervision’s work over recent years to secure international convergence on revisions to supervisory regulations governing the capital adequacy of internationally active banks. Following the publication of the Committee’s first round of proposals for revising the capital adequacy framework in June 1999, an extensive consultative process was set in train in all member countries and the proposals were also circulated to supervisory authorities worldwide. The Committee subsequently released additional proposals for consultation in January 2001 and April 2003 and furthermore conducted three quantitative impact studies related to its proposals. As a result of these efforts, many valuable improvements have been made to the original proposals. The present paper is now a statement of the Committee agreed by all its members. It sets out the details of the agreed Framework for measuring capital adequacy and the minimum standard to be achieved which the national supervisory authorities represented on the Committee will propose for adoption in their respective countries.  The Basel Committee on Banking Supervision is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries......

Words: 1645 - Pages: 7

Basel Ii

...The Basel II was proposed in 1999 as a more comprehensive capital adequacy accord, formally known as A Revised Framework on International Convergence of Capital Measurement and Capital Standards, and informally as “Basel II”. Each Pillar of Basil I was expanded to cover new approaches. A. Pillar I Known as Minimum Capital Requirements, Basel II creates a more sensitive measurement of a bank’s risk-weighted assets. It broadens the scope of regulation to include assets of the holding company of an internationally active bank to avoid the risk that a bank will “hide” risk-taking by transferring its assets to other subsidiaries. Basel II proposes three mutually exclusive methods. The first method, known as the Basic Indicator Approach, recommends that banks hold capital equal to fifteen percent of the average gross income earned by a bank in the past three years. Regulators are allowed to adjust the 15% number according to their risk assessment of each bank. The second method, known as the Standardized Approach, divides a bank by its business lines to determine the amount of cash it must have on hand to protect itself against operational risk. Each line is weighted by its relative size within the company to create the percentage of assets the bank must hold. The third method, the Advanced Measurement Approach is much more demanding for regulators and banks alike: it allows banks to develop their own reserve calculations for operational risks. Regulators, of course, must......

Words: 522 - Pages: 3