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Indian Economy

Basel III Requirements

  • 20 Jun 2019
  • 4 min read

According to a report by the Basel Committee on Bank Supervision (BCBS), the Reserve Bank of India has fallen short of meeting tougher requirements set by the Basel III norms.

  • The report looked at adoption status of Basel III standards by 30 global systemically important banks (G-Sibs) as of end-May 2019.
  • The RBI is yet to publish the securitisation framework and rules on Total Loss-Absorbing Capacity (TLAC) requirements.
    • Securitisation framework includes credit enhancement facility, liquidity facility, underwriting facility, interest rate or currency swaps and cash collateral accounts.
    • TLAC requirements ensures that G-Sibs have adequate loss absorbing and recapitalisation capacity so that critical functions can be continued without taxpayers’ funds or financial stability being put at risk.
  • The RBI is also yet to come out with draft regulations on revised Pillar 3 disclosure requirements, which took effect from end-2016.
  • Indian banks are in the process of implementing rules on Interest Rate Risk in the Banking Book (IRRBB). The central bank is also yet to come out with final guidelines on the same. Globally the rules were effective from end-2018.

Basel III Norms

  • Basel III is an internationally agreed set of measures developed by the BCBS in response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision and risk management of banks.
  • BCBS members are committed to implementing and applying standards in their jurisdictions within the time frame established by the Committee.
  • Basel 3 measures are based on three pillars:
    • Pillar 1: Improve the banking sector's ability to absorb ups and downs arising from financial and economic instability
    • Pillar 2: Improve risk management ability and governance of banking sector
    • Pillar 3: Strengthen banks' transparency and disclosures

Basel Committee on Bank Supervision (BCBS)

  • It is a committee under the Bank For International Settlements.
    • Established in 1930, the BIS is owned by 60 central banks, representing countries from around the world that together account for about 95% of world GDP.
    • Its head office is in Basel, Switzerland.
    • Its mission is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.
  • It is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters.
  • The Committee identifies global systemically important banks (G-SIBs) using a methodology that includes both quantitative indicators and qualitative elements.
  • A global systemically important bank is a bank whose systemic risk profile is deemed to be of such importance that the bank’s failure would trigger a wider financial crisis and threaten the global economy.
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