Banking Sector in India: Basel Norms

Basel norms or Basel accords are the international banking regulations issued by the Basel Committee on Banking Supervision.
The Basel norms is an effort to coordinate banking regulations across the globe, with the goal of strengthening the international banking system.
It is the set of the agreement by the Basel committee of Banking Supervision which focuses on the risks to banks and the financial system.
Norms:
- Basel I Norms-
  - The first Basel Accord, known as Basel I, was issued in 1988
  - It focused on credit risks and defined capital and structure of risk weights for banks
  - The minimum capital requirement was fixed at 8% of the Risk-Weighted Assets (RWA)
- Basel II Norms-
  - It is the refined and reformed version of Basel I, which was published in 2004.
  - It defined 3 types of risks – Operational Risks, Capital Risks, and Market Risks.
- Basel III Norms-
  - Basel III guidelines were released in December 2010 in the backdrop of the financial crisis of 2008.
  - The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding, and liquidity.

CRAR or Capital Adequacy Ratio (CAR) refers to the availability of sufficient capital as a percentage of risk-weighted assets.
Thus, CRAR = [Total Capital/(Total Risk-Weighted Assets)]x100
Where, Total Risk-Weighted Capital = Weighted average of total capital assets held by the bank.
CRAR is fixed under Basel Norms.
The principle behind fixing CRAR is that banks should have an adequate amount of their own capital to cover risks arising from Bad Assets (Bad Loans)
For the calculation of CRAR, the loan amount given in each sector is to be multiplied by the presumed risk percentage of a specific sector. The product gives the amount of risk-weighted assets.

The capital conservation buffer (CCB) is designed to ensure that banks build up capital buffers during normal times (i.e., outside periods of stress) which can be drawn down as losses are incurred during a stressed period.
Introduced in Basel III norms.

The countercyclical capital buffer is intended to protect the banking sector against losses that could be caused by cyclical systemic risks increasing in the economy.
Countercyclical capital buffers require banks to hold capital at times when credit is growing rapidly so that the buffer can be reduced if the financial cycle turns down or the economic and financial environment becomes substantially worse.
Introduced in Basel III.