What are Basel Norms? Explain the developments in these norms over the years.

Meaning of Basel Norms

Basel Norms are international banking regulations issued by the Basel Committee on Banking Supervision (BCBS) to ensure that banks across the world maintain minimum capital, proper risk management, and financial stability. They protect depositors and reduce the chances of bank failures.

What are Basel Norms?

Basel Norms are international banking regulations issued by the Basel Committee on Banking Supervision (BCBS).
They aim to strengthen the banking system by ensuring banks maintain adequate capital, risk management practices, and supervision standards. Basel norms of Banking in India.

In simple words:
👉 Basel norms help banks stay safe, avoid failures, and protect depositors by maintaining minimum capital and managing risks properly.

Developments in Basel Norms Over the Years

Basel norms evolved in three major phases:

Basel I,

Basel II,

Basel III,

and an upcoming framework called

Basel IV (informal name).

1. Basel I (1988) – First Stage of Global Banking Regulation

Objective:
To create a simple and uniform capital adequacy standard for banks.

Key Features:

1. Introduced the concept of Capital Adequacy Ratio (CAR) – minimum 8% capital. Basel norms of Banking in India.
2. Classified assets according to risk weights (0%, 20%, 50%, 100%).
3. Focused mainly on credit risk.
4. Simple structure, easy to implement.

Limitations:

• Ignored other risks like market risk and operational risk.
• Too simple for modern banking complexities.

2. Basel II (2004) – Improved Risk Sensitivity

Objective:
To make capital requirements more risk-sensitive and strengthen supervision.

Three Pillars of Basel II:

Pillar 1: Minimum Capital Requirements

• Covers Credit Risk, Market Risk, and Operational Risk.
• Offers advanced approaches like IRB (Internal Rating Based) methods.

Pillar 2: Supervisory Review

• Regulators review banks’ internal assessment of risks. Basel norms of Banking in India

Pillar 3: Market Discipline

• Requires banks to disclose financial information to ensure transparency.

Advancements over Basel I:
✔ Included operational risk
✔ More accurate risk measurement
✔ Better supervision and transparency

Limitations:

• Failed during the 2008 Global Financial Crisis because it underestimated risks.
• Over-reliance on credit rating agencies.

3. Basel III (2010) – Post-Crisis Strengthening of Banks

Objective:
To address the weaknesses exposed during the 2008 crisis and build a stronger, more resilient banking sector. Basel norms of Banking in India

Key Features:

(a) Higher Capital Requirements

• Increased minimum capital ratios.
• Emphasis on Common Equity Tier 1 (CET1).

(b) Capital Buffers

1. Capital Conservation Buffer – 2.5%
2. Counter-cyclical Buffer – 0–2.5%

(c) Liquidity Standards

1. Liquidity Coverage Ratio (LCR) – banks must hold enough liquid assets for a 30-day stress period.
2. Net Stable Funding Ratio (NSFR) – ensures long-term stable funding.

(d) Leverage Ratio

• Non-risk-based measure to prevent excessive borrowing. Basel norms of Banking in India

(e) Systemically Important Banks (SIBs)

• Extra capital for “too big to fail” banks.

Importance:
✔ Builds shock-absorbing capacity
✔ Improves liquidity
✔ Reduces chance of bank collapse

4. Basel IV (2023 onwards – Informal Term)

(Not an official name, but commonly used for the revised Basel III final reforms.)

Key Developments:

1. Revised credit risk framework with standardized approaches.
2. Limits the use of banks’ internal models.
3. Introduced Output Floor – ensures banks do not lower capital by using advanced models.
4. Further strengthens capital for market & operational risk. Basel norms of Banking in India

Objective:
To make capital requirements more consistent, transparent, and comparable across banks globally.

Summary of Evolution

• Basel I → Introduced minimum capital adequacy (simple).
• Basel II → Added risk-sensitive framework (credit, market, operational risk).
• Basel III → Stronger capital, liquidity norms after 2008 crisis.
• Basel IV → Refinements to standardize and strengthen Basel III.

Note:- Important questions of Banking and Insurance services

1. Methods of risk Management
2. Reforms in Indian Banking in India

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Basel norms of Banking in India