International Convergence Of Capital Measurement And Capital Standards

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1. Introduction
The 2008 Global Financial Crisis (GFC) and its aftermath had critically damaged the world economy with a drag in global economic growth. Indubitably, the imprudence in which banks managed their risks and capital holdings were among reasons that caused the crisis. It raised the need for industry reform, leading to G20’s Basel III proposal in 2010 to strengthen the global capital framework by imposing stricter rules regarding capital and liquidity requirements, as well as a focus on transparency, consistency and quality. 2. Regulatory Framework
Table 1 highlights the main differences between Basel I, Basel II and Basel III.
Table 1 Basel 1, Basel II and Basel III Basel I Basel II Basel III
Framework • One size fits all • International Convergence of Capital Measurement and Capital Standards • Firm specific and risk based
Minimum Capital Requirements • 8% Total Capital Adequacy Ratio (CAR)
• 4% Tier 1 • 8% Total CAR
• 4% Tier 1
• 4% Core Tier 1 • 10.5% Total CAR
• 6% Tier 1
• 4.5% Core Tier 1
Measure of Credit Risk • Standardized Approach • Standardized Approach
• Internal Ratings Based (IRB) Approach • Standardized Approach
• Internal Ratings Based (IRB) Approach
Measure of Operational Risk N.A. • Basic Indicator Approach (BIA)
• Standardized Approach
• Advanced Measurement Approach (AMA) • Basic Indicator Approach (BIA)
• Standardized Approach
• Advanced Measurement Approach (AMA)
Measure of Market Risk N.A. • Standardized Approach
• Internal VaR

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