1). On 26 June 1974 a number of banks had released Deutschmarks (the German currency) to the Herstatt Bank in exchange for dollar payments deliverable in New York
2). Due to differences in the time zones, Herstatt Bank ceased operatins between the times of the respective payments and before the dollar payments could be effected in New York, the Hersatt Bank was liquidated by German regulators
3). The G-10 nations responded to this incident by forming the Basel Committee Supervision in late 1974, under the Bank for International Settlements (BIS) located in Basel, Switcherland BASEL-I
BASEL - 1
1). In 1988 the Basel Committee on Banking Supervision (BCBS) in Basel published a set of minimum capital requirements for banks known as Basel I norms
2). Features of Basel I
3). Assets of banks were classified and grouped in five categoris according to credit risk, carrying the following risk weights
4). Banks with an international presence are required to hold capital equal to 8% of their risk-weighted assets (RWA).
5). From 1988 this framework was introduced within the G-10 nations initially and then ver 100 countries adopted the rules prescribed by the Basel I
1). Basel II was introduced in 2004 with more refined definations for capital adequacy, risk management and disclosure requirements
2). It used external rating agencies to set the risk weights for corporate and banks
3). Disclosure requirements allowed market participants to access the capital adequacy of the institution based on information on the following aspects
4). In Basel II norms Operational Riskhas been defined as the risk of loss resulting from inadequate or failed internal processes, people and systems
5). Basel II uses a “three pillars” concept namely
1). The Basel II regulations did not have any explicit norm on the debt that banks could take but focused on financial institutional ignoring the systematic risks
2). Therefore to ensure that banks don’t take excessive debt and not rely on short term funds the Basel III norms were proposed in 2010
3). Basel III promoted a more resilient banking system on the following 4 important banking parameters namely
4). Requirements of common equity and Tier 1 capital will be 4.5% and 6% respectively
5). Leverage ratio calculated by dividing Tier I capital by the bank’s average total consolidated assets will be greater than 3% ,in other words is the ratio of relative amount of caital to total assets.
6). The minimum Liquidity Coverage Ratio (LCR) will reach upto 100% by 1st January 2019 to prevent situations like Bank Run.