Basel Norms

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Evolution of Basel Norms and their contribution to the Subprime Crisis The article highlights the emergence of the Basel Accord in 1998 and how it has evolved over the course of the last 23 years. Contrary to the popular belief capital regulations have been considered the biggest underlying factor of the subprime crisis owing to securitization, the shadow banking system and the flexibility given to banks in risk assessment. The recent Basel III norms though aim to mitigate the already caused damage, the results are still left to be witnessed. Evolution of Basel Norms and their contribution to the Subprime Crisis The article highlights the emergence of the Basel Accord in 1998 and how it has evolved over the course of the last 23…show more content…
The Basel Capital Accord (Basel I) was adopted in 1988, and had two main objectives; * Strengthen the soundness and the stability of the international banking system – minimum capital adequacy ratio by assessing the credit risk of the banks * Create a level playing field among international banks – Banks from different countries competing for the same loans would have to set aside roughly the same amount of capital on the loans Fallout of Basel I and emergence of Basel II Basel I set the platform for maintaining the adequate capital cushion required by the banks in the event of a default or grim situations. However the adequate capital (Tier I & Tier II) to be maintained was solely based on the credit risk (on-balance sheet, trading off-balance sheet, non trading balance sheet) assessment which was divided into 4 categories of Government Exposures with OECD countries - 0%, OECD banks and non – OECD governments – 20%, Mortgages – 50%, Other Exposures, retail and wholesale(SMEs) – 100% Though the main aim of formulating the Basel Norms was to ensure the optimal capital cushion to be maintained required in the event of a crisis, the very introduction of Basel Accord, increased the gap between economical and risk-based capital and gave rise to regulatory capital arbitrage (RCB). The drawback that a loan to a safe industrial country and that to a volatile developing country
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