The Basel Norms were introduced by the Reserve Bank of India (RBI) mai...
- The Basel Accords are a set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regard to capital risk, market risk, and operational risk. The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses. The Basel Committee has issued three sets of regulations which are known as Basel-I, II, and III.
- In Basel-I norms the capital adequacy ratio was agreed upon—a requirement was imposed upon the banks to maintain a certain amount of free capital to their assets cushion against probable losses in investments and loans. • The capital adequacy ratio is the percentage of total capital to the total risk—weighted asset. CAR, a measure of a bank’s capital, is expressed as a percentage of a bank’s risk-weighted credit exposures: CAR= Total of Tier 1 & Tier 2 capitals ÷ Risk-Weighted Assets.
- The Reserve Bank of India decided in April 1992 to introduce a risk-asset ratio system for banks (including foreign banks) in India as a capital adequacy measure in line with the Capital Adequacy Norms prescribed by Basel Committee. It was aimed at Improving the banking sector’s ability to absorb shocks arising from financial and economic stress.
- Market risk refers to the risk to a bank resulting from movements in market prices in particular changes in interest rates, foreign exchange rates, and equity and commodity prices. In simpler terms, it may be defined as the possibility of loss to a bank caused by changes in the market variables.
- Credit risk is most simply defined as the potential that a bank’s borrower or counterparty may fail to meet its obligations in accordance with agreed terms.
- Currently, Basel III norms are implemented in India with effect from April 1, 2013.
- Hence option (a) is the correct answer.
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The Basel Norms were introduced by the Reserve Bank of India (RBI) mai...
Improving the banking sector's ability to absorb shocks arising from financial stress
The Basel Norms, introduced by the Reserve Bank of India (RBI), were primarily aimed at enhancing the resilience of the banking sector. The norms were designed to help banks better withstand financial stress and economic shocks by ensuring they maintain adequate capital levels to cover potential losses.
Key points:
- The Basel Norms set minimum capital requirements for banks, taking into account the risks they face in their operations.
- By requiring banks to hold sufficient capital, the norms aim to reduce the likelihood of bank failures and enhance the stability of the financial system.
- Banks that adhere to the Basel Norms are better equipped to absorb losses during periods of economic downturns or financial crises, thereby safeguarding depositors' funds and maintaining overall financial stability.
- The norms also promote sound risk management practices within banks, encouraging them to assess and manage risks effectively to protect their financial health.
In conclusion, the primary objective of the Basel Norms introduced by the RBI was to improve the banking sector's ability to absorb shocks arising from financial stress. By setting minimum capital requirements and promoting sound risk management practices, the norms aim to enhance the resilience of banks and contribute to the overall stability of the financial system.