Prepared by : Name Bhakti Shelar Dipali Golatkar Viraj Palande Shailesh Pashte Ajeesh Anand ITM, Thane SMBA - 2

Roll no 08 13 07 09 20

Introduction
Globalization of Banking in India has vital importance. There has been increasing banking complexities in banking transactions, capital requirements, liquidity, credit and risks associated with them. The World Trade Organization (WTO), of which India is a member nation, requires the countries like India to get their banking systems at par with the global standards in terms of financial health, safety and transparency, by implementing the Basel II Norms by 2009. Basel Committee - It is formed because of liquidation problem of cologne based bank i.e. Herstatt Bank. - Established by the central-bank Governors of the Group of Ten countries, located at the Bank for International Settlements in Basel, Switzerland - 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. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. - The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland.

Basel Accords
Basel I - 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. Basel II - Then the second accord by the name Basel Accord II was established in 1999with a final directive in 2003 for implementation by 2006. - 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. Basel III - It was developed because of the deficiencies in financial regulations reveled by the late 2000s financial crisis. - It Strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. It is a need for Indian Banks to practice Banking Business as per global standards and make the banking system in India more reliable, transparent and safe. These norms are necessary because of increased capital flows from foreign countries and increasing cross-border economic & financial transactions in India.

Basel I
Had drawbacks, so to overcome these drawbacks Basel II was introduced with coverage of all other riIn 1988,BCBS( Basel Committee in Basel, Switzerland) published a set of minimal capital requirements for banks, also known as the Basel Accord, and was enforced by law in the G-10 countries in 1992 The standards are almost entirely addressed to credit risk. Assets of banks grouped in five categories - carrying risk weights of 0%,10%,20%,50%,100%. Required to hold capital equal to 8 % of the risk-weighted assets.

Required banks to identify their Tier-I (Equity Capital & Disclosed Reserves) and Tier-II (Undisclosed Reserves) capital and assign risk weights to the assets. Risk weights were based on what the parties to the Accord negotiated rather than on the actual risk of each asset. Commercial loans, for example, were assigned to the 100% risk weight category. To calculate required capital, a bank would multiply the assets in each risk category by the categorys risk weight and then multiply the result by 8%. Thus, a Rs 100 commercial loan would be multiplied by 100% and then by 8%, resulting in a capital requirement of Rs8. Since Basel is concentrating only upon Credit risk and not other banks operational risks it was not successful and risks.

Basel II

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). Capital Adequacy Ratio = Tier I Capital +Tier II Capital Risk Weighted Assets (RWA) Risk Weighted Assets = Market Risk(RWA) + Credit Risk(RWA) + Operation Risk(RWA) Market Risk (RWA) To calculate this there is Var Approach . It allows the measurement and the anticipation of market risk. It determines the overall investment portfolios percentage of loss (shortfall probability) due to market risk. Operation Risk(RWA) - To calculate this there are 3 approaches i.e. Basic Indicator Approach = Banks average annual income for last 3 years x Percentage given by Basel 2 Accord , Standardized Approach = Gross income of each 8 lines of business x Beta Value specified by Basel II Accord ( Current 15%), Advanced Measurement Approach = Banks can use their own internal risk measurement system to calculate capital charge for operational risk. Accord gives quantitative and qualitative criteria to use in AMA. Credit Risk(RWA) There are 2 approaches i.e. The Standardized approach = Gross income x Ratings given by External Rating Agencies ( Fitch, Cricil etc.), Internal Rating Based Approach= Gross income x Own internal risk ratings. Ratings for Banks - AAA to AA- = 20%, A+ to A- = 50%, BBB+ to BBB- = 50%, BB+ to B- = 100%, Below B- = 150%

Pillar II: Supervisory Review

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. Pillar 3 disclosures can be broadly divided into the following categories: - Capital structure (debt/equity) - Capital adequacy (capital/risk weighted assets) -Risk

Qualitative disclosures such as risk management objectives and policies, definitions etc. maybe also published.

Basel III
Basel II Norms offers a variety of options in addition to the standard approach to measuring risk. But it Paves the way for financial institutions to proactively control risk in their own interest and keep capital requirement low which leads to financial crisis in year 2007. Hence Basel III was created. Objectives: Strengthening the resilience of the banking sector. International framework for liquidity risk management, standards and monitoring. RBI Guidelines: Guidelines on the implementation of BASEL III Capital Regulations were released by the Reserve Bank of India (RBI) on May 2, 2012. Implementation of these guidelines will begin January 1, 2013 and the process will be completed by March 31, 2018. Banks required to maintain a minimum 5.5% in common equity (as against the current 3.6%) by March 31, 2015 Banks to create a capital conservation buffer (consisting of common equity) of 2.5% by March 31, 2018 Banks to maintain a minimum overall capital adequacy of 11.5% (against the current 9%) by March 31, 2018 Conditions stipulated to increase the loss absorption capacity of banks Additional Tier I; Banks not to issue additional Tier I capital to retail investors Risk-based capital ratios to be supplemented with a leverage ratio of 4.5% during parallel run Banks allowed to add interim profits (subject to conditions) for computation of core capital adequacy Banks to deduct the entire amount of unamortised pension and gratuity liability from common equity Tier I capital for the purpose of capital adequacy ratios from January 1, 2013

Basel III impact on Public Sector Banks

4.5%
Vijaya Bank United Bank Union Bank
UCO Bank Syndicate Bank State Bank of India - Group
4.90%

7%
6.40% 7.69% 6.85% 8.16% 7.06% 7.91% 7.06%
7.17% 8.24%

10.5%
12.50%

Common Equity Tier 1 Tier-1 (Net of Deduction) % CRAR

As per the March 2010 dataset

12.80% 12.51% 13.21%

12.70% 13.49% 13.10% 14.16%

8.60% 9.28% 7.14% 7.68%

The Average Common Equity Tier 1 capital of Public Sector Banks is 7.27% and average CRAR is 13.21%.
The Maximum and minimum of the core capital (common equity tier 1) are 10.50% and 4.37%. Core Capital - One Bank is below Basel III prescribed CET Tier 1 - Three Banks are falling short of Basel III prescribed Tier I capital (net of deductions). The CRAR of all the public sector banks is above 10.5%.

Punjab & Sind Bank Punjab National bank Oriental Bank of Commerce Indian Overseas Bank
Indian Bank IDBI Bank Dena Bank Corporation Bank

8.04% 9.11% 8.63% 9.28% 7.68% 8.67%

12.54%

14.78% 10.50% 11.13% 12.71% 11.48%

12.77% 15.37% 12.23% 13.43%

4.37% 6.35% 7.33% 8.16% 8.19% 9.25%

Central Bank of India Canara Bank Bank of Maharashtra Bank of India (Consolidated)
Bank of Baroda Andhra Bank Allahabad Bank

4.71%

6.83%

7.99% 8.54% 5.61% 6.41% 7.51% 8.57%

8.43% 9.20% 7.81% 8.18% 7.72% 8.12%

12.78% 13.00% 14.36%

13.93% 13.62%

10.0%

12.0%

14.0%

16.0%

18.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Basel III impact on Private Banks

4.5% 7% 10.5%

ING Vysya Bank Indusind

South Indian Bank

9.62% 10.11% 9.65% 9.65%

12.42% 12.42%

Common Equity Tier 1

14.91%

As per the March 2010 dataset

Tier-1 (Net of Deduction) % CRAR

15.33%

15.39%

Axis Bank Jammu & Kashmir Bank

HDFC Bank

10.89% 11.18% 12.79% 12.79%

13.13% 13.26%

The Average Common Equity Tier 1 capital of Private Banks is 12.67% and average CRAR is 14.91%.
The Private Banks are well cushioned above the Basel III defined Core (Common Equity Tier 1) capital The Maximum and minimum of the core capital (common equity tier 1) are 17.31% and 9.62%. The CRAR of all the private banks is above 10.5%.

15.80%

15.89%

17.44% 16.92% 16.92% 18.36%

Federal Bank ICICI Group Kotak Group Yes Bank

10.0% 0.0% 2.0% 4.0% 6.0% 8.0%

12.12% 12.92%

19.15% 17.31% 17.31%

19.28%

11.84% 12.85%

12.0%

14.0%

16.0%

18.0%

20.0%

Basel III impact on Foreign Banks

4.5% 7%
6.72%

10.5%
Common Equity Tier 1 Tier-1 (Net of Deduction) %
15.77%

RBS

7.94%

As per the March 2010 dataset The Average Common Equity Tier 1 capital of Foreign Banks is 13.78% and average CRAR is 16.39%. The Foreign Banks are well cushioned above the Basel III defined Core (Common Equity Tier 1) capital

CRAR

Standard Chartered Bank

8.94%

8.94% 12.41%

16.50%

Deutsche Bank

16.50%

18.03%

16.62%

Barclays Bank

16.62%
17.21%

16.63%

The Maximum and minimum of the core capital (common equity tier 1) are 17.29% and 6.72%.
The CRAR of all the foreign banks is above 10.5%. However, these are as per the March 2010 dataset and the implementation of definition of capital as per Basel III are not taken into consideration.

HSBC Bank

16.63% 17.86%

17.29%

Citibank -Group

17.29% 17.07%

10.0%

12.5%

15.0%

17.5%

20.0%

0.0%

2.5%

5.0%

7.5%

Thank You