Presented By:

Finance Department
Finhance Pvt Ltd.

About the BIS

Established on 17 May

1930
The BIS is the worlds
oldest
international
financial organization
Head office is in Basel,
Switzerland
and
representative offices in
Hong Kong SAR and in
Mexico City.
The
BIS
currently
employs around 550 staff
from 50 countries.

List of Member Central Banks

Basel committee on Banking

Supervision (BCBS)
A set of agreements
Regulations and recommendations on Credit

risk , market risk and operational risk

Purpose to have enough capital on account
to meet obligations and absorb unexpected
losses

BASEL 1
In 1988, the Basel Committee(BCBS) in Basel,

Switzerland, published a set of minimal capital

requirements for banks, known as 1988
BaselAccord or Basel 1.
Primary focus on credit risk
Assets of banks were classified and grouped
in five categories to credit risk weights of zero
0, 10, 20, 50 and up to 100%.
Assets like cash and coins usually have zero
risk weight, while unsecured loans might have
a risk weight of 100%.

Capital Adequacy Ratio

(CAR)

Expressed as a percentage of a bank's risk

weighted credit exposures.
Also known as "Capital to Risk Weighted
Assets Ratio (CRAR).

Ratio is used to protect depositors and

promote the stability and efficiency of

financial systems around the world.

Purpose of Basel 1
1. Strengthen the stability of international

banking system.
2. Set up a fair and a consistent international
banking system in order to decrease
competitive inequality among international
banks
Achievement :
to set up a minimum risk-based capital

adequacy applying to all banks and

governments in the world

Basel Norms & Indian

Basel Accord I.System
was established in 1988 and was
Banking

implemented by 1992 in India.

over 3 years banks with branches abroad were
required to comply fully by end March 1994 and
the other banks were required to comply by end
March 1996.
RBI norms on capital adequacy at 9% are more
stringent than Basel Committee stipulation of 8%.
Commercial Banks , Cooperative Banks and
Reginal rural banks banks have different RBI
guidelines

Pitfalls of Basel I
Limited differentiation of credit risk

(0%, 20%, 50% and 100%)

Static measure of default risk
The assumption that a minimum 8% capital ratio is
sufficient to protect banks from failure does not take into
account the changing nature of default risk.
No recognition of term-structure of credit risk
The capital charges are set at the same level regardless of
the maturity of a credit exposure.
Simplified calculation of potential future
counterparty risk
The current capital requirements ignore the different level
of risks associated with different currencies and
macroeconomic risk. In other words, it assumes a common
market to all actors, which is not true in reality.
Lack of recognition of portfolio diversification effects
In reality, the sum of individual risk exposures is not the
same as the risk reduction through portfolio diversification.
Therefore, summing all risks might provide incorrect
judgment of risk

Conclusion
Basel 1- Milestone in Finance and Banking

History
It launched the trend toward increasing risk
modeling research
However, its over-simplified calculations, and
classifications have simultaneously called for
its disappearance, paving the way for the
Basel II Capital Accord
It led to further agreements as the symbol of
the continuous refinement of risk and capital

Thank You