Basel I and Basel II Norms

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1、BaselIandBaselIINorms:SomeEmpiricalEvidencefortheBanksinIndiaNeelamDhanda*andShaluRani**TherecentfinancialsectorcrisisandthefailureofbankingsystemeveninthedevelopedcountrieslikeUShaveforcedthepolicymakersandresearcherstolookintothedetailsofsuchfailures.Capitalade

2、quacyisanindicatorofthefinancialhealthofthebankingsector.ItismeasuredbytheCapitaltoRiskWeightedAssetRatio(CRAR),definedastheratioofabank’scapitaltoitstotalrisk-weightedassets.Financialregulationsgenerallyimposeacapitaladequacynormontheirbankingandfinancialsystemi

3、nordertoprovideabuffertoabsorbunforeseenlossesduetoriskyinvestments.TheCRARisthemostwidelyemployedmeasureforthesoundnessofabank.Globally,theCRARrangesbetween7.1%and34.9%.TheoverallCRARoftheIndianscheduledcommercialbanksattheendofMarch,2007was12.3%,asagainsttheInd

4、ianregulatoryrequirementof9%,whichitselfwashigherthantheBaselnormof8%.ThisstudypresentsthestatusofCapitalAdequacyRatio(CAR)ofdifferentcategoriesofbanksandalsoascertainstheimpactofapplicationofBaselIInormsonCARofselectedbanks.IntroductionTherecentfinancialcrisisan

5、dthefailureofbankingsystemeveninthedevelopedcountriesliketheUShaveforcedthepolicymakersandresearcherstolookintothedetailsofthesefailures.Capitaladequacyisanindicatorofthefinancialhealthofthebankingsystem.Capitalstandardsacrosstheworldareconvergingatthebehestofthe

6、BaselCommitteeonBankingSupervision.InJuly1988,theBaselCommitteeonBankingSupervisionapprovedtheadoptionofarisk-basedcapitalstandardsforbanksinmembercountries.Priortotheintroductionoftheserisk-basedcapitalstandards,banksintheG-10weresubjecttoleveragerequirementswhi

7、chmandatedbankstoholdaflatpercentageoftheirassetsascapital,irrespectiveofthelevelofriskintheirportfolio.BeginningonDecember31,1990,therisk-basedcapitalstandardssupplementedtheexistingleveragerequirements.Althoughtherisk-basedcapitalstandardsweredesignedtomakethec

8、apitalstandardssimilaracrossallcountriesaccordingtotheBaselCommittee,theirprimarypurposewastopreparebankstoholdcapitalinaccordancewiththeperceivedriskintheirpo