Basel Norms

Basel Norms, also known as the Basel Accords, are a set of international banking regulations that establish standards for risk management, capital adequacy, and regulatory compliance. The Basel Committee on Banking Supervision (BCBS) developed these norms to ensure the stability of the banking system and minimize risks.

Basel Norms I

Basel norms are also referred to as banking supervision accords. These are simple standards aimed at increasing the capital ratios of various banks. Basel norms also provided a benchmark for analytical comparative assessment.

Why Basel Norms?

Banks around the world lend to different types of borrowers having different creditworthiness. They lend the deposits of the public and money raised from the market. This exposes the banks to a variety of risks of default. As a result, banks have to keep a certain percentage of capital as security in case of risk of non-recovery. The Basel Committee has created various norms to tackle this risk.

Basel Norms Types

The Basel Committee has issued the following sets of regulations.

1. Basel I: Basel I was introduced in 1988. This Basel norm focused on credit risk. Credit risk arises when a borrower fails to repay a loan or meet contractual obligations. This norm defined the capital and structure of risk weights for banks. The minimum capital requirement was set as 8% of risk-weighted assets. Risk-weighted assets mean a bank's assets are weighted according to risk.

2. Basel II: Basel II guidelines were issued in 2004. These norms were refined versions of Basel-I norms. These norms were based on the following three parameters.

• Banks should retain a minimum capital adequacy requirement of 8% of risk assets.
• Banks were advised to develop and use better risk management techniques.
• Banks must disclose their capital adequacy requirement and risk exposure to the central bank.