BASEL | Understanding Basel I, Basel II, & BASEL III

Basel I introduced two key concepts. First, it defined what banks could hold as capital, as well as designating capital as Tier 1 or Tier 2 according to its loss-absorbing or creditor protecting characteristics. The second key concept introduced in Basel I was that capital should be held
by banks in relation to the risks that they face. The major risks faced by banks relate to the assets held on balance sheet. Thus, Basel I calculated banks’ minimum capital requirements as a percentage of assets, which are adjusted in accordance with their riskiness and assigning risk weights to assets. Higher weights are assigned to riskier assets such as corporate loans, and lower weights are assigned to less risky assets, such as exposures to government.
Basel II recognizes that banks can face a multitude of risks, ranging from the traditional risks associated with financial intermediation to the day-to-day risks of operating a business as well as the risks associated with the ups and downs of the local and international economies.
BASEL III global regulatory and supervisory standards mainly seek to raise the quality and level of capital (Pillar 1) to ensure that banks are better able to absorb losses on both a going concern and a gone concern basis, increase the risk coverage of the capital framework, introduce leverage ratio to serve as a backstop to the risk-based capital measure, raise the standards for the supervisory review process (Pillar 2) and public disclosures (Pillar 3) etc.
#learner #motivation #loksewa #nrb #nbl #adbl #rbb #ganeshbistdavid