Academic journal article Journal of Emerging Trends in Economics and Management Sciences

Basel III Implementation: Readiness of Public Sector Banks in India

Academic journal article Journal of Emerging Trends in Economics and Management Sciences

Basel III Implementation: Readiness of Public Sector Banks in India

Article excerpt

Abstract

Basel III is a new regulatory framework recommended by Basel Committee on Banking Supervision in order to strengthen capital & liquidity structure of International Banking System. This framework aims to promote stronger liquidity buffers in the banking sector in order to improve its ability to absorb shocks arising from financial and economic stresses. Under Basel III the total capital a bank is required to hold is 8.0% of its risk-weighted assets. Total capital is divided into two broad categories: Tier I capital which is available to absorb losses on a "going-concern" basis and Tier II Capital, "gone concern" capital that absorbs losses in insolvency prior to depositors losing any money. The implementation of Basel III norms will have significant impact on profitability and lending capabilities of the banks particularly across few industries such as construction, project financing, shipping etc. This study is an effort to explore capital adequacy framework of Indian Public Sector Banks to analyze their readiness to comply with the regulations of Basel III. It will offer an insight into the measures taken by various PSBs to meet the capital adequacy requirements of Basel III.

Keywords: new regulatory framework, public sector banks, tier I capital, tier II capital, capital adequacy ratios, reserve bank of India, non- performing assets.

INTRODUCTION

The New Regulatory Framework Basel III is a continuation of Basel I and Basel II initiatives of the Basel Committee on Banking Supervision (BCBS). The BCBS proposed the Basel III framework as a response to the financial crisis that hit the G8 capital markets recently. The framework targets to strengthen global capital and liquidity regulation in order to inculcate prudent practices in capital markets and foster a strong international financial system.

Basel III reforms work on two tiers, the bank level and macro prudential level. The former aims to help in raising the resilience of individual banking institutions to periods of stress, while the later addresses wider risks that can be built up across the entire banking system and the whole economy. Key elements of this framework require financial institutions to strengthen the capital requirements for counterparty credit risk exposures.

Provisions of Basel III

Under Basel III the total capital a bank is required to hold is 8.0% of its risk-weighted assets. Total capital is divided into two broad categories: Tier I capital and Tier II capital. Broadly speaking, Tier I capital is capital that is available to absorb losses on a "going- concern" basis, or capital that can be depleted without placing the bank into insolvency, administration or liquidation. Tier II capital is capital that can absorb losses on a "gone-concern" basis, or capital that absorbs losses in insolvency prior to depositors losing any money.

TIER I CAPITAL

Tier I capital is comprised of both Common Equity Tier I capital and Additional Tier I capital. Common Equity Tier I capital is the purest form of capital and includes common shares and retained earnings. The required ratio of Common Equity Tier 1 capital to risk-weighted assets will go up from 2% to 4.5% under Basel III. This percentage will also be more difficult to meet as Basel III has introduced stricter regulatory adjustments. These new capital requirements will be progressively phased in between 1 January 2013 and 1 January 2015.

Additional Tier I capital mainly consists of instruments issued by the bank which are able to meet specific criteria (and are not included in Common Equity Tier I capital). Basel III has introduced stricter criteria for determining what constitutes Additional Tier I capital in order to ensure these instruments absorb losses of a bank on a going- concern basis.

CAPITAL CONSERVATION BUFFER

Basel III has also introduced a capital conservation buffer which requires an additional 2.5% of Common Equity Tier I capital to be held over and above the absolute minimum requirements. …

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