Market risk refers to the potential for financial losses arising from fluctuations in market variables such as interest rates, exchange rates, and asset prices. In the banking sector, market risk—also known as systemic risk—can significantly affect a bank’s profitability and stability. This form of risk stems from movements in financial markets and is inherently difficult…
The ‘Market risk’ is an umbrella term used for multiple types of risk associated with adverse changes in market variables that include Liquidity Risk, Interest rate risk, Foreign exchange rate risk and equity price risk. Market risk causes substantial changes in income and economic value of banks. It’s not about whether a loan will be repaid…
[Critical components like, Important Financial Institutions (SIFIs),Capital Conservation Buffer, Counter Cyclical Buffer, Leverage Ratio and Risk Based Supervision (RBS) are all part of the Basel III framework, which aims to strengthen the resilience of the global banking system.] The Basel III framework, developed by the Basel Committee on Banking Supervision, aims to enhance the resilience…
Capital conservation buffer (CCB) is a concept introduced under the international Basel III norms. According to Basel III norms, during good times, banks must build up a capital buffer that can be drawn from when there is stress. Individual countries are allowed to take their own decision in this matter. In India, to adhere to…
The Basel III framework, developed by the Basel Committee on Banking Supervision, is a comprehensive set of international banking regulations designed to strengthen regulation, supervision, and risk management within the banking sector. It is structured around three key components, or “pillars”: Focus on Pillar 3: Promoting Market Discipline through Transparency Pillar 3 aims to bolster…
The Supervisory Review Process (SRP) is a key component of Pillar 2 of the Basel III framework. It reinforces the principle that banks must not only meet minimum regulatory capital requirements but also maintain capital commensurate with their entire risk profile—including risks not fully captured under Pillar 1. SRP promotes bank-specific oversight, fosters sound risk…
The Basel III Accord strengthens the regulatory framework for banks by enhancing capital requirements and addressing key risk categories, including credit risk, market risk, and operational risk. It also outlines mechanisms for credit risk mitigation (CRM) and introduces buffers to ensure resilience in times of financial stress. 1. Capital Requirements under Basel III Basel III…
Under Pillar 2 of the Basel II Accord, banks are required to hold additional capital to cover operational risks that may not be adequately captured under Pillar 1. This additional requirement, known as the Pillar 2 capital add-on, is determined through the supervisory review process (SRP), which evaluates a bank’s internal assessment of capital adequacy…
The Basel II Accord was developed as an enhancement to the original Basel I framework, with the objective of creating a more comprehensive, risk-sensitive, and globally consistent regulatory standard for banks. It addressed critical gaps in Basel I by incorporating additional risk categories, refining capital adequacy norms, and emphasizing supervisory oversight and market discipline. Need…
Basel III builds upon the foundation of Basel II by introducing stricter capital requirements, liquidity standards, and a leverage ratio to enhance the resilience of the global banking system. While Basel II focused on risk-based capital requirements, Basel III expands on this by adding liquidity standards and a non-risk-based leverage ratio to prevent excessive risk-taking…
