What are Basel Accords (I,II and III)

BCBS is a committee of banking supervisory authorities that was established by the central bank governors of the G-10 countries in 1974 with a proposal of working towards building new international financial structures with the goal of minimizing credit risk in financial sector. Basel accord is the guidelines on regulatory standards formulated by Basel committee on banking supervision (BCBS). The accord popularly known as  Basel code on capital adequacy’ is global capital measures and capital standards, which stipulate on how much capital a bank should have in place in relation to the risk it undertakes  in  relation to various types of assets in the balance sheet as well as off-balance sheet business of the banks.  Under the said system the  balance  sheet  assets,  non-funded  items  and  other  off-balance  sheet  exposures  are  assigned  prescribed  risk  weights and banks have to maintain unimpaired minimum capital funds equivalent to the prescribed ratio on the aggregate of the risk weighted assets and other exposures, on an ongoing basis. The  BCBS has so far introduced a capital measurement system commonly referred to as Basel I, Basel II and Basel III, which seeks to improve the banking sector’s ability to deal with financial stress, improve risk management, and strengthen the banks’ transparency.

There are seven domestic and three international rating agencies in India which are accredited for the purpose of risk weighting the banks’ claims for capital adequacy purpose. The long term and short term ratings issued by these credit rating agencies have been mapped to the appropriate risk weights applicable as per the Standardized approach under Basel Frame work. Under the Basel Accords, BCBS has fixed the minimum requirement of capital funds for banks at “8” per cent of the total risk-weighted assets.

What is basel III, Why it is important?