Basel Norms, also known as Basel Accords or Basel Framework, are a set of international banking regulations developed by the Basel Committee on Banking Supervision (BCBS). The BCBS is a global committee of banking supervisory authorities that aims to enhance the stability and soundness of the international banking system.
The Basel Norms consist of three main accords:
- Basel I: Basel I was introduced in 1988 and focused on minimum capital requirements for banks. It established a framework for calculating capital adequacy ratios based on the risk-weighted assets of banks. The accord set a minimum capital requirement of 8% of risk-weighted assets, with different risk weights assigned to different types of assets.
- Basel II: Basel II, implemented in 2004, aimed to improve the risk management practices of banks and enhance the stability of the financial system. It introduced more sophisticated risk assessment and management techniques, including three pillars:
a. Pillar 1: Minimum Capital Requirements – Similar to Basel I, it defined the minimum capital banks must hold based on credit risk, market risk, and operational risk.
b. Pillar 2: Supervisory Review Process – This pillar focused on the supervisory review of a bank’s risk management practices and internal controls. Regulators assess banks’ risk profiles and determine whether additional capital buffers are required.
c. Pillar 3: Market Discipline – Banks are required to disclose information regarding their risk profiles, capital adequacy, and risk management practices to promote transparency and market discipline. - Basel III: Basel III was introduced in response to the global financial crisis of 2008. Its primary objective was to strengthen the regulation, supervision, and risk management of banks. Key features of Basel III include:
a. Higher Capital Requirements – Basel III increased the minimum common equity Tier 1 capital requirement to 4.5% of risk-weighted assets and introduced a capital conservation buffer and countercyclical buffer.
b. Liquidity Requirements – It introduced the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) to ensure banks maintain adequate liquidity buffers. c. Leverage Ratio – Basel III introduced a non-risk-based leverage ratio to limit excessive leverage in the banking system. d. Enhanced Risk Management – The framework placed a greater emphasis on risk management practices, including measures to address systemic risk, improve risk governance, and enhance risk disclosures.
The Basel Norms provide a global framework for banking regulation, aiming to promote financial stability, strengthen risk management practices, and enhance the resilience of the banking sector.