Global Adoption of Basel III norms Will bring financial stability ?

 

Literature Review

Good health of banks determines future of one country whereas its illness may adversely impact overall growth, banks act as arsenals during adverse situations and extrapolate monetary direction during healthy phase; we have observed many cases of the banking turmoil both India and Abroad. Starting from 1930 global financial crisis which impetus to form a certain global standard in international banking. The first Basel Committee Banking Supervision (BCBS) was formed in 1930 (France and Germany played an imperative role after world war II to make it more worthy) but that time it was formed to monitors gold balance with various banks, the golden standard committee recommended to liquidize BCBS but later it was nullified, it was formed to monitors gold balance with various banks, the golden standard committee recommended to liquidize BCBS but later on it was nullified, though real importance of BCBS was realized after 1974 when two major banks of Europe collapse and aftermath of coming to 1980 Basel I norms came to its existence after G10 submit (Cho 2013). Another reason for BCBS existence was to avoid oligopoly in the banking industry to stop the race to capital accumulation because politicians can influence the decision making of banks to gain more and more lucrative results so Basel I norms were recommended to the various member of BCBS especially for European Union and the United States but gradually the US have decline extrapolation of BCBS norms and consider it very fragile and implemented its own tighter norms then BCBS (after the  turmoil of 2008 crisis another reason of US for not strongly considering the Basel norms is the failure of Basel II which came after 1999) Basel II failure cascaded for various reason like it was a guideline rather than a frame work or stipulation which is not a kernel for the countries to implement it. It was also observed that under single club of various countries like EU cannot able to operate under single book regulation and then fiasco like Greece emerged which resurrected new debate whether to opt for the single guidelines or not failure of which will be equally distributed to rest of the club members (Michele Fratianni and John C. Pattison march 2015). But still, after the implementation of singular rules in EU, banks like Monte Pasche demise (in Italy) ultimately survived through European Central Bank (ECB) bailout packages.

A classification from early-comprehensive adopters to late-partial adopters

Early- Gradual- Late – Non-implementers
comprehensive comprehensive comprehensive
EU27 Brazil Bangladesh 30 countries in Africa Jordan
Australia India Central African Rep. Afghanistan Kazakhstan
Canada Indonesia Chad Albania Kosovo
Croatia Israel Chile Anguilla Kyrgyz Republic
Gibraltar Malaysia Egypt, Arab Rep. Antigua and Barbuda Macao, China
Guernsey Mexico Macedonia, FYR Armenia Moldova
Hong Kong Pakistan Nigeria Azerbaijan Mongolia
Iceland Philippines Peru Bahamas Montenegro
Isle of Man Saudi Arabia Russian Federation Barbados Montserrat
Japan Sri Lanka Turkey Belarus Netherlands Antilles
Jersey Thailand Belize Nicaragua
Korea, Rep. Bhutan Palestine
Liechtenstein Bolivia Panama
New Zealand Bosnia and Herzegovina Papua New Guinea
Norway British Virgin Islands St. Kitts and Nevis
Singapore Brunei St. Lucia
South Africa Cambodia St. Vincent
Switzerland Colombia Suriname
Taiwan Cook Islands Syrian Arab Republic
Early-partial Gradual-partial Late -partial Costa Rica Tajikistan
adopters adopters adopters Dominica Trinidad and Tobago
Bahrain Argentina Dominican Republic Ukraine
Kuwait Aruba El Salvador Uruguay
Mauritius Bermuda Fiji Vanuatu
Morocco Cayman Islands Grenada Venezuela, RB
Nepal China Guatemala Vietnam
Oman Ghana Guyana
Qatar Lebanon Honduras
UAE Maldives Jamaica
United States

Source: (Cho 2013)

Case Study of the global diffusion of Basel Norm II

The practical implementation of Basel norms is challenged in various developed and developing countries starting from Latin America (like Chile). Latin America banking advisory committee called Commission of the Association of the banking Supervision Agencies of Latin America and the Caribbean (ASBALC) which latterly name as Association of supervisors of the Banks of the Americans (ASBA) has shown the desire to implement the Basel norms II but ASBA gave attention to BCPs (whether the economy have certain conceptual frame work to implement the Norms) and it was decided by the ASBA that there is need to revamp capital adequacy frame work but the BCPs of country is not ready to grasp the Basel II frame work till the end of 2010.

More than 80% banks agreed to implement the Basel II structure with operation implementation of pillar 1and gradually to 2, 3rd but it was found that more than 60% bank was not able to implement Pillar 1 approach till 2005. Another case of Korea largest lending bank KB initially agreed to pave Basel II norms and started its prerequisite internal assessment and found that G10 nation has sophisticated credit risk model unlike Korea KB bank, Korea stipulated to recapitulate its banking norms before implementation of Basel II. Therefore only Malaysia banks like UOB, OCBC under the supervision of Monetary Authority of Singapore(MAS) able to implement Basel II norms as its till the end of 2008 this is because UOB bonhomie with the MAS operation and Singapore complete banking sector were operating parallel with the UK.

 

In Indian Context:

India have to implement Basel III norms until the end of March 2019. Therefore before implementing Basel III frame, there is a certain question which we should ponder upon as follows: Importance of Basel norms, Basel financial stability, what will be the basic framework, whether India should be more rigid, whether global uniformity will stabilise financial risk.

  • Traditional banking lacks futuristic approach and more concern about its own lucrative results not focus about capital accumulation and risk-weighted factors, therefore, have to face sudden cyclical turmoil due to which bank cannot calculate its performance and factors responsible for it. To avoid it certain framework was to halt future turmoil in the banking sector but have potential to concretised risk minimisation. Basel norms try to frame banking parameters to avail uniformity and try to ameliorate the global banking uncertainties.
  • Basel norms prior motive is to form a shield in case of uncertainty rather than directing norms for the lucrative results. It tries constructing path towards risk minimisation by suggesting optimality for the bank growth.
  • The basic framework of Basel II norms will follow certain structure as follows:
  1. Widen Operations Risk will be involving more factors in the risk to measure risk more intensively by considering some minor variables which do not identify usually.
  2. Better capital quality will be those possible areas which have least risks baring factors and can accumulate more capital.
  3. Countercyclical Buffer Stock will be the amount to avoid the seasonality in the banking sectors there might be a situation of high and low demand for money supply to counter it CCBS are been developed.
  4. Leverage Ratio is the amount of risk under which bank can offer its loans its the percentage will be determined by the central bank of various countries and by the Basel.(LR= Tier I/Total Assets)
  5. Liquidity Coverage Ratio is the amount of buffer which will be utilised during the shocks of the high demand for liquidity.
  6. Net Stable Funding Ratio is the amount of fund which each bank have to endure under a period of time it involves stable funding rate and amalgamates bank liabilities and assets.
  7. Global Systematic Important Banks will the list of some important banks worldwide they will be closely monitored by the Basel committee under the slogan to big to fail therefore no bank of India acquires its name under GSIB list till now.
  8. Domestic Systematic important banks will be work on similar principle like GSIB but it will only consider the domestic patriarchy of a nation.

(All the above details will completely clarify after 2019 when RBI will publish its Basel norms)

  • India is enduring heavy Nonperforming assets which are rising to billions, therefore, it will be totally dependent on the RBI and the government of India how they look at the Basel norms rigidity but there can be a possibility that India might do not opt exact Basel frame because it might lose it investments and the desired rate of growth.
  • The primary motive of Basel norms to bring the financial stability across the globe that also means to unify the similar banking norms for the rest of the banks all over the world but this uniformity will have certain constraints, the rationality may lead to serious financial turmoil (2008 will be appropriate example which required Dod Frank Act to D unify the entire financial system).

Conclusion

Now let us envisage what can happen if India does not able implement Basel III by the end of 2019 or what can be the repercussions. Firstly India government stipulated to implement Basell III till March 2019 in G20 submit (2011) but if not India may have to face problem in terms of an international monetary system with the foreign banks and can break various financial aids from IMF and other foreign banks. Despite this for India, it will wait and watch policy how other Asian country like China, Japan and financial co-operation club like BRICS, Asian Development Bank respond to Basel III framework.

Mohit Pandey

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