Question

Identify no less than five minimum standards under Basel II and III, and present the key elements of how these standards function.

Answer 1

Basel II :

Basel II is one of the three international banking regulatory accord namely the second, which is being based on these standards mentioned below with their functioning :

1) It lays obligations on banks for maintaining a minimum ratio ( capital ratio) where regulatory capital being over on risk weighted assets : It defines the regulatory capital, what is it and has set an 8% as minimum regulatory coefficient to be maintained for regulatory capital over the risk weighted assets.

2) It sets the requirements of disclosures for assessing capital adequecy in banks : Banks should have enough capital to meet all risks, they should be in adequate quantity an thus maintaining control in the environment.

3) It helps in incorporating the credit risks of the assets in determining the regulatory capital ratios which are held by the various financial institutions : For this risk weighted capital has been adapted. It is contributing by helping various financial institutions in complying with this credit risk management of Basel II. The regulatory capital which is to be withhold are minimized and hence provides a significant advantage.

4) It acts as regulatory supervising body : It helps in providing framework regarding various national regulatory bodies who are involved in dealing with different types of risks namely the liquidity risks, the legal risks and also the systematic risks.

5) It helps in maintaining market discipline : For helping the different users of financial statements, this provides requirements of disclosures for risks exposures of banks, capital adequecy and assessment processes of risks.

Basel III has set standards to make banks more strengthen regarding capital requirements. This is done by increasing the liquity in banks and simultaneously decreasing the leverage of banks.

Let us discuss its standards and their functions :

1) Capital requirements : It mandates banks to make them fund with 4.5 % of equity shares and it has also made mandatory to maintain capital conservation buffer. Banks are required to hold 7% of CET1 capital ratio.

2) Nationadl regulators are allowed to rise an additional of 2. 5 % of their capital when there is situation of high credit growth by a discretionary counter clinical buffer.

3) liquity coverage ratio is meant to make a bank hold enough of good quality liquid assets so that its total net cash outflows is covered under thirty days.

4) One more standard set is regarding the net stable funding ratio, according to which the amount available for stable funding should be more than the required amount for a stable funding for about a period of one year. This way funding requirement would never lack

5) tm There should be a minimum leverage ratio. It can be calculated as tier 1 capital being divided by the total exposure which is Bank's total assets which are consolidated.