RISK MANAGEMENT UNDER BASEL III :

As per Basel Committee on Banking Supervision (BCBS), Basel III reforms have been introduced to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, thus reducing the risk spillover from the financial sector to the real economy.

Basel III norms address the following:

(a) At micro level, through prudential regulation to strengthen the individual banking institution’s ability to handle crisis in the period of stress

(b) At macro level, through prudential regulation to address system wide risks across banking sector as well as the pro-cyclical amplification of these risks over a period of time

(c) Raising the quality and level of capital to ensure that the banks are better equipped to absorb losses on both, a going concern basis and a gone concern basis

(d) Increase the level of risk coverage of the capital framework by introducing leverage ratio to serve as a backdrop to the risk-based capital

(e) Raise the standards for supervisory review (Pillar 2) and public disclosures(Pillar 3)

(f) The capital buffers- capital conservation buffer and the countercyclical buffer- are expected to protect the banking sector from the periods of excess credit growth.

The BASEL III capital regulations continue to be based on three-mutually reinforcing Pillars viz. minimum capital requirements, supervisory of  capital adequacy, and market discipline, of BASEL II.

In India guidelines on Basel III capital regulation have been im plem ented from April 1, 2013 in a phased manner. To ensure smooth transition to BASEL III, appropriate transitional  arrangements have been made for meeting the minimum BASEL III capital Ratios, full regulatory adjustments to the components of capital, etc. Consequently, BASEL III capital regulations would be fully implemented as on March 31, 2018.

Guidelines on Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools under Basel III:

The Basel III Framework on Liquidity Standards includes Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and liquidity risk monitoring tools. RBI’s guidelines included enhanced guidance on liquidity risk governance, and measurement, monitoring and reporting to the Reserve Bank on liquidity positions. The Basel III liquidity standards were subject to an observation period/revision by the Basel Committee with a view to addressing any unintended consequences that the standards may have for financial markets, credit extension and economic growth.

The Basel Committee has issued guidelines on the Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools in January 2013, and is in the process of finalizing the NSFR and disclosure requirements. The LCR is to be implemented from January 1, 2015 and the NSFR from January 1, 2018. The Reserve Bank will issue the final guidelines on Basel III liquidity standards and liquidity risk monitoring tools, taking into account the revisions by the Basel Committee.