Financial Regulatory And Financial Challenges Of The Indian Banking System

The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions

Investment Banking is now at a crucial junction, where Investment and Commercial Banking are splitting up due to the ring fence which is being built around these two banking areas. As well, the new upcoming regulation, Basel III, will have a huge impact in the investment banks, with higher liquidity and capital requirements, in order to increase solvency and stability in financial industries.

The American Banking system has always focused on order, resiliency and the ability to withstand the storm. When comparing banking systems, it is required analyze both the strengths and the weaknesses of each system. While examining the American banking system, a key strength that is presented is the pride if its resiliency, “these improvements in the resiliency of the banking system have been reinforced by a series of key capital and liquidity rules that have been enacted in the United States, including the Basel III capital and liquidity frameworks as adopted in more stringent form” (The State of American Banking).

To address this deficiency, the Basel Committee on Banking Supervision (BCBS) proposed the post-crisis regulatory capital framework - Basel III, aimed to improve both the quantity and quality of banking organisations regulatory capital and to build additional capacity for loss absorbency into the banking system to withstand markets and economic shocks (BCBS). The importance of capital to a banking organisation cannot be overemphasised, the amount of capital held by a bank determine: (i) the level risk the bank can enter into. (ii) Loss absorbency capacity. (III) The profitability level. (iv) The cost of fund. (v) Investors' confidence, and (vi) the going - concern of the bank. It is vital that banking organisations are able to maintain a balance between their capital risk portfolios. As a result, banks tend to adjust their balance sheet components to achieve an internally set capital

The Basel III proposals by Basel Committee on Banking Supervision (BCBS) specified minimum capital and liquidity requirements that should reduce chances of banking crises in the future. However, meeting these standard requirements can reduce banks’ profitability and entail additional costs.

Basel III pillar 1 significantly enhance the core capital adequacy ratio required level for the banking sector, the new standard requires banks within eight years, in phases to constitute a capital requirement of ordinary shares increased to 7%, the capital adequacy level standard rates are need to set at 6%, which the banks are required to reserve not less than 2.5% of the bank 's risk capital buffer funds, if the bank failed to meet the requirements, the bank dividends, share buybacks and bonuses and other acts will be subject to have strict restrictions. At the same time, the agreement also requires banks to maintain 0-2.5% of the counter-cyclical regulatory capital, in order to effectively prevent hidden risk of bad debts cause by excessive lending during the boom years, and to help banks when economic downturn. Next, total assets core capital is called leverage ratio, leverage ratio of capital adequacy ratio is an important indicator of regulatory

This study presents a comprehensive assessment of the balance sheet in commercial, insurance and investment institutions. The balance sheet is the list of a bank’s assets and liabilities. It provides information to investors about the firm’s financial position, performance and changes in financial position (Orens, & Lybaert, 2010). Banks are required under the Basel II Accord to come up with data inferring their level of exposure to risk and by those figures a minimum capital requirement is assigned (Basel Committee, 2006). The Basel II Accord is a cornerstone of a formal quantitative framework of risk management (Basel Committee, 2006). It is a standardized new requirement for financial institutions to retain a minimum level of capital to guarantee that obligations are met (Basel Committee, 2006).

Basel III establishes a set of standards for the implementation of a liquidity ratio for international banks , a leverage ratio , counter-cyclical measures , a redefinition of equity and a review of the coverage of certain risks . This set of standards will help to strengthen the resilience of the financial and banking sector in anticipation of further financial and economic stress , regardless of the source. All of its new measures that the Basel Committee has developed to strengthen the regulation, supervision and risk management in the banking sector aims to strengthen transparency and communication within banks,

Bank regulation plays a vital part in the economy today and can be attributed for a lot of its success. It has even been taken to the extent of individuals claiming bank regulation to be the backbone of our modern day economy. To fully understand this topic it is first important to define what bank regulations are. Bank regulations are a kind of government regulation that makes banks liable to certain requirements, restrictions and guidelines. Bank regulation includes determining specific regulations and guidelines to oversee all of the activities and operations of banking organizations. Banking regulations can vary widely between nations and can even be changed due to certain jurisdictions. However, even though they can differ, most

Basel III consists of a comprehensive set of reform measures intended to improve the regulation, supervision and risk management of the banking sector (APRA 2013). Being developed mainly in response to the credit crisis of 2007, it requires banks to maintain adequate leverage ratios and meet certain capital requirements. Basel III builds on the basis of previous Basel I and Basel II and is aimed at improving the banking sector’s ability to deal with financial stress and turmoil, strengthen the banking sectors transparency and improve risk management (Investopedia 2015).

The financial instability of the past few years has provided important evidence that can be used for the detection of dangerous flaws in the international banking system. After the financial crisis of 2008- 2009, the Basel Committee on Banking Supervision made significant steps in improving understanding the key supervisory issues and improvement of banking regulation worldwide. Subsequently, new standards were created for banking system regulation, which represents upgraded capital requirements, liquidity norms, and additional monitoring tools for banking supervision and regulation. These standards were first established in 2009 by the BCBS though some of the Committee’s proposals remain currently open for discussion.

To address deficiencies in the financial regulations revealed by the financial crisis affecting the world since 2008 it was developed a new Basel Accord, - BASEL III. BASEL III is a global regulatory standard on bank capital tolerability, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. (Tarullo, DK, 2008)

In this section, we will describe the Basel Committee’s approach to financial regulation. The approach is described trough an exposition and analysis of the three Basel frameworks. We are going to explain all three of them, as the preparation of new regulation is build on top of the existing ones. It will therefore also be interesting to see in which direction the Basel Committee has changed the regulation

The Reserve Bank of India (RBI) is India’s central bank. Though public sector bank’s currently dominate the banking industry, numerous private and foreign banks exist. India 's government-owned banks dominate the market. Their performance has been mixed, with a few being consistent profitable. Several public sector banks are being restructured, and in some the government either already has or will reduce its ownership.

FINANCIAL MANAGEMENT ASSIGNMENT ON INDIAN FINANCIAL SYSTEM & SOURCES OF LONG TERM AND SHORT TERM FINANCES