Basel Norms and Banking Regulations

Vocabulary flashcards covering key terms, pillars, ratios, and definitions from the Basel Norms framework (Basel I, Basel II, and Basel III).

Basel Norms

A set of international banking regulations issued by the Basel Committee on Banking Supervision (BCBS) to strengthen the global banking system by ensuring banks maintain adequate capital and manage risks effectively.

Basel Committee on Banking Supervision (BCBS)

A standard-setting body established in 1974 by Central Bank Governors of G-10 Countries, headquartered in Basel, Switzerland, that sets international banking standards and guidelines.

Credit Risk

The risk that a borrower fails to repay a loan.

Risk Weighted Assets (RWA)

A measure reflecting that a bank's assets carry different levels of risk, where assets like government securities carry very low risk while personal loans carry higher risk.

Pillar 1 of Basel II

Minimum Capital Requirement, which mandates that banks maintain minimum capital for Credit Risk, Market Risk, and Operational Risk, with a minimum CAR of $8\%$.

Pillar 2 of Basel II

Supervisory Review, under which regulators supervise banks and ensure they have proper systems for risk management, internal controls, and capital planning.

Pillar 3 of Basel II

Market Discipline, which requires banks to disclose their Capital Adequacy Ratio (CAR), risk exposure, and financial position to increase transparency and market confidence.

Market Risk

The risk of financial loss resulting from changes in market prices.

Operational Risk

The risk of financial loss resulting from human error, fraud, or system failure.

Capital Adequacy Ratio (CAR) in India

The total minimum capital requirement set at $9\%$ under Basel III, consisting of $7\%$ Tier 1 Capital and $2\%$ Tier 2 Capital.

Capital Conservation Buffer (CCB)

An extra capital buffer of $2.5\%$ maintained during normal times to absorb future losses.

Counter-Cyclical Capital Buffer (CCyB)

An additional capital buffer ranging from $0\%$ to $2.5\%$ designed to be built up during economic booms.

Leverage Ratio

A Basel III requirement calculated as $\text{Leverage Ratio} = \frac{\text{Tier 1 Capital}}{\text{Total Consolidated Assets}}$ set at a minimum of $3\%$ to avoid excessive borrowing.

Liquidity Coverage Ratio (LCR)

A short-term liquidity requirement calculated as $\text{Liquidity Coverage Ratio} = \frac{\text{High Quality Liquid Assets}}{\text{30 Days Net Cash Outflow}}$ designed to ensure banks can survive a $30\text{-day}$ acute stress period.

High Quality Liquid Assets (HQLA)

Unencumbered liquid assets, such as cash and government securities, maintained by banks to handle short-term cash outflows during stress scenarios.

Net Stable Funding Ratio (NSFR)

A medium-term funding requirement calculated as $\text{Net Stable Funding Ratio} = \frac{\text{Available Stable Funding}}{\text{Required Stable Funding}}$ with a minimum requirement of $100\%$ to ensure stable funding over a $1\text{-year}$ horizon.