Challanges faced by global banks that lead entire world's bank to Switzerland's city called-BASEL:
1)Risk management: high NPA
2)Misuse of the banks: By gov and budinessman
3)banks transparency:banks different rate and profit and NPA should be in public domain
4)Credit allocation
SOLUTION:
led to Principal of global Banking:
1)Minimum Rjequirements
2)Supervisary review process
3)Market Discipline
Minimum Requirement:
It is the minimum level required by the banks to follow across the world. Here minimum requirement
is divided in two parts
1)capital requirements(For banks to grow)
2)Reserved requirements(for banks to be stable and minimise losses)
Supervisary review process:
RBI is the supervisor of banks in INDIA. so under this RBI has to make laws for license, guideline and
punishment. this is made for proper review of banking.
Market Discipline:
RBI makes it coumpusary for banks to publish all its details for public viewing.
BASEL1: 1988
AIM: "focused on Credit Risk"(focused only one among three solution stated above in principal of
global banking)
Explaination: When bank gives loan to "X" and if there is a risk that "X" would not be able to pay back this type of loan given to"X" is called "Credit Risk".
Action: BASEL 1 launched RWA(Risk Waighted Asset)
RWA(CAR)=(total risk)/(total asset)=atleast 8%
Drawback AKA path to BASEL 2:
>Principle of global banking has 3 principle written above. In this BASEL 1 complies with only 1) ie.
minimum requirement.
BASEL 2: 2004
AIM: to utilise all three princliple
EXTRA: increased RWA(CAR) to 9%...and also in total capital included both Tier 1(paid up capital which is
normally owned by banks or industries whose tier 2 you are calculating) and Tier 2(secandry capital,
like debentures)
Drawback AKA path to BASEL 3: 2010
>Gobal Recession of 2008....puri duniya ki middle finger ho gyi thi.(Resession: money supply in a
countory is less and unemployment is high).
>this recession had hit USA badly.look for my earlier article on this recession.
Action:1) RWA(CAR)=10.5% . since INDIA can't achive RWA=10.5% in 2010 and it baged time till 2020 so she
has to maintain RWA(CAR)=11.5% consedring the future scenerio.
otherthan pricipal of global banking it focused on 1)liquidity and 2) Stablity.
2)4.5% of RWA should be for common equity(Commons Equity=funds of the public...ie. public share)
INCIDENT : destruction in faith of banking due to recession of 2008.
3)Capital Conservation Buffer= this is simmilar to RWA(CAR), If in case bank fails and it is not
able to recover even from RWA(CAR) it will use CCB(Capital Conservation Buffer).
CCB=2.5% of RWA(CAR)
4)Counter Cyclical Buffer(Optional)=If in case economy is having lots of exchange or money then this
buffer is filled and if the money supply is less this buffer will be empitied. This is just to provide addtional security.
1)Risk management: high NPA
2)Misuse of the banks: By gov and budinessman
3)banks transparency:banks different rate and profit and NPA should be in public domain
4)Credit allocation
SOLUTION:
led to Principal of global Banking:
1)Minimum Rjequirements
2)Supervisary review process
3)Market Discipline
Minimum Requirement:
It is the minimum level required by the banks to follow across the world. Here minimum requirement
is divided in two parts
1)capital requirements(For banks to grow)
2)Reserved requirements(for banks to be stable and minimise losses)
Supervisary review process:
RBI is the supervisor of banks in INDIA. so under this RBI has to make laws for license, guideline and
punishment. this is made for proper review of banking.
Market Discipline:
RBI makes it coumpusary for banks to publish all its details for public viewing.
BASEL1: 1988
AIM: "focused on Credit Risk"(focused only one among three solution stated above in principal of
global banking)
Explaination: When bank gives loan to "X" and if there is a risk that "X" would not be able to pay back this type of loan given to"X" is called "Credit Risk".
Action: BASEL 1 launched RWA(Risk Waighted Asset)
RWA(CAR)=(total risk)/(total asset)=atleast 8%
Drawback AKA path to BASEL 2:
>Principle of global banking has 3 principle written above. In this BASEL 1 complies with only 1) ie.
minimum requirement.
BASEL 2: 2004
AIM: to utilise all three princliple
EXTRA: increased RWA(CAR) to 9%...and also in total capital included both Tier 1(paid up capital which is
normally owned by banks or industries whose tier 2 you are calculating) and Tier 2(secandry capital,
like debentures)
Drawback AKA path to BASEL 3: 2010
>Gobal Recession of 2008....puri duniya ki middle finger ho gyi thi.(Resession: money supply in a
countory is less and unemployment is high).
>this recession had hit USA badly.look for my earlier article on this recession.
Action:1) RWA(CAR)=10.5% . since INDIA can't achive RWA=10.5% in 2010 and it baged time till 2020 so she
has to maintain RWA(CAR)=11.5% consedring the future scenerio.
otherthan pricipal of global banking it focused on 1)liquidity and 2) Stablity.
2)4.5% of RWA should be for common equity(Commons Equity=funds of the public...ie. public share)
INCIDENT : destruction in faith of banking due to recession of 2008.
3)Capital Conservation Buffer= this is simmilar to RWA(CAR), If in case bank fails and it is not
able to recover even from RWA(CAR) it will use CCB(Capital Conservation Buffer).
CCB=2.5% of RWA(CAR)
4)Counter Cyclical Buffer(Optional)=If in case economy is having lots of exchange or money then this
buffer is filled and if the money supply is less this buffer will be empitied. This is just to provide addtional security.
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