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Basel I Basel I, that is, the 1988 Basel Accord is focused on the credit risk. It is the initial step by the Basel committee after the 1974 incident of Herstatt Banks bankrupt. Assets of the banks are grouped
committee after the 1974 incident of Herstatt Banks bankrupt. Assets of the banks are grouped and categories based on the risk level. Banks with the international exposure must have the 8% capital. Basel I is outdated and it is not suitable for the modern trend of banks with the huge transactions around the world. Basel II Basel II, which is created on 2004, is focused on to create the international banks regulations for the banks. It wants to address the problem of capital adequacy based on its risk. The problem was that Basel II is very slowly adopted by the banks, the 2008 crisis could not be avoided because banks are not followed the Basel II regulations.
Capital Requirements
2013 Minimum capital requirements: Start of the gradual phasing-in of the higher minimum capital requirements. 2015 Minimum capital requirements: Higher minimum capital requirements are fully implemented. 2016 Conservation buffer: Start of the gradual phasing-in of the conservation buffer.
Leverage Ratio
2011 Supervisory monitoring: Developing templates to track the leverage ratio and the underlying components. 2013 Parallel run I: The leverage ratio and its components will be tracked by supervisors but not disclosed and not mandatory. 2015 Parallel run II: The leverage ratio and its components will be tracked and disclosed but not mandatory. 2017 Final adjustments: Based on the results of the parallel run period, any final adjustments to the leverage ratio. 2018 Mandatory requirement: The leverage ratio will become a mandatory part of Basel III requirements. The additional capital requirements of the public banks could be around 3 lakhs crore to meet the basel norms. The Basel III capital ratios will be fully implemented on March 31, 2018. Banks have to maintain Tier I capital, or core capital, of at least 7 per cent of their risk weighted assets on an ongoing basis. Under the current Basel II norms, banks have to maintain the Tier I capital of at least 6 per cent of their risk weighted assets. The total capital ratio including Tier -I and Tier-II is 9%. Here Tier I is cash and Tier II is bonds. The good thing is we have time till 2018 to achieve the target. When it comes to the public sector banks, if the banks are not able to raise the capital then govt. has to infuse the money into the system. It is going to be another burden for the govt. which already suffering from the current account deficit.
Summary
If you look on the Basel III norms, over all it is very good for the banks. In the initial period, banks (mainly public sector banks) would be under more pressure to raise the capital which would reduce the number of loans sanctioned. It is good for the future. If you are investor choosing the banking stocks, for the long term basel norms would be beneficial. There is no reason to panic. If you have queries on this, please post it in the comments section.
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