The Hindu Analysis
Prelims Special for UPSC CSE Only
(Basic to Advance)
Important NEWS Summary
Section – Economic
Topic- Basel Norm
What is Basel
- Basel is a city in Switzerland
- which is also the headquarters of Bureau of International Settlement (BIS).
- BIS fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
- BIS established on 1930
- It is world’s oldest international financial organisation.
- There are two representative offices in the Hong Kong and in Mexico City.
- In total BIS has 60 member countries from all over the world and covers approx 95% of the world GDP.
- set of agreement by the BCBS (BASEL COMMITTEE ON BANKING SUPERVISION), which mainly focuses on risks to banks and the financial system are called Basel accord.
- purpose of the accord is to ensure that financial institutions have enough capital on account to meet the obligations and absorb unexpected losses.
- India has accepted Basel accords for the banking system.
- BASEL ACCORD has given us three BASEL NORMS which are BASEL 1,2 and 3.
Before going ahead ..what is Tier-1 Capital
- Paid up Capital, Statutory Reserves, Other disclosed free reserves, Capital Reserves which represent surplus arising out of the sale proceeds of the assets, other intangible assets belong from the category of Tier1 capital.
- Paid–up capital àis the amount of money a company has received from shareholders in exchange for shares of stock. Paid–up capital is created when a company sells its shares on the primary market, directly to investors.
- Statutory Reserves à are Reserves to be maintained by banks in India as per Banking Regulation Act ,1949
- Any reserve to be maintained by Act or law is statutory reserve .
Tier 2 – Tier-II capital can be said to be subordinate capitals.
- Undisclosed reserves, Revaluation Reserves, General Provisions and loss reserves , Hybrid debt capital instruments such as bonds, Long term unsecured loans, Debt Capital Instruments etc belong from the category of Tier 2 capital.
Risk Weighted Assets
- RWA means assets with different risk profiles; it means that we all know that is much larger risk in personal loans in comparison to the housing loan, so with different types of loans the risk percentage on these loans also varies.BASEL-1
- In 1988, The Basel Committee on Banking Supervision (BCBS) introduced capital measurement system called Basel capital accord, also called as Basel 1.
- It focused almost entirely on credit risk, It defined capital and structure of risk weights for banks.
- The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA).
- India adopted Basel 1 guidelines in 1999.
- In 2004, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord.
The guidelines were based on three parameters which are as follows
- Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
- Banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that is credit and increased disclosure requirements.
- The three types of risk are- operational risk, market risk, capital risk.
- Banks need to mandatory disclose their risk exposure, etc to the central bank.
- Basel II norms in India and overseas are yet to be fully implemented.
- In 2010, Basel III guidelines were released.
- These guidelines were introduced in response to the financial crisis of 2008.
- In 2008, Lehman Brothers collapsed in September 2008, the need for a fundamental strengthening of the Basel II framework had become apparent.
- Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
- The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.
- Presently Indian banking system follows Basel II norms.
- The Reserve Bank of India has extended the timeline for full implementation of the Basel III capital regulations by a year to March 31, 2019.
This notes for those aspirants who knows the Basic stuff…..( Experienced player)
Final Notes for Prelims
Section – Economic
What is Basel III?
- Basel III is a global, voluntary regulatory framework.
- It deals with :
- Bank capital adequacy,
- Market liquidity risk and
- Stress testing.
- It was agreed by Basel Committee on Banking Supervision (BCBS) members in 2010–11.
- It focuses primarily on the risk of a run on the bank, requiring differing levels of reserves for different forms of bank deposits and other borrowings.
- It does not, supersedes the guidelines known as Basel I and Basel II for the most part, rather works alongside them.
- In March 2014, RBI had extended Basel III deadline up to March 31, 2019
Section – Economic
2-Trade Receivables Discounting System or TReDS
- Trade Receivables Discounting System or TReDS is an initiative undertaken by RBI to safeguard the interest of micro, small and medium enterprises (MSMEs) that, because of large organizations, always finds it very hard to convert their trade receivables into liquid funds in short period.
- RBI thus by undertaking TReD an electronic platform, has mechanized the financing of trade receivables of MSMEs from corporate buyers through two or more financiers is known as Trade Receivables Discounting System wherein all registered MSMEs can discount their bills of exchange or invoice through TReDS with a quoted price.
- This system will ensure the competitive pricing offer from the financer.
- The seller can opt for a financer of his choice. TReDS deals with discounting of both invoices and bills of exchange.
- It was well-equipped with discounting and re-discounting of trade receivables thus facilitating higher volumes of transaction with better pricing.
Section – Economic
3-Society for Worldwide Interbank Financial Telecommunication. (SWIFT)
- Society for Worldwide Interbank Financial Telecommunication. (SWIFT) is a secure financial message carrier.
- SWIFT is global financial messaging service that enables financial institutions worldwide to send and receive information about financial transactions in secure, standardized and reliable environment.
- It is used to transmit messages relating to cross border financial transactions.
- founded in 1973
- headquartered in La Hulpe, Belgium.
- It transports messages from one bank to its intended bank recipient, it carries an average of approximately 26 million financial messages each day.
How SWIFT works?
There are several ways of connecting to it
- Directly through permanent leased lines, the Internet, or SWIFT’s cloud service (Lite2).
- Indirectly through appointed partners.
In layman Language
- Messages sent by SWIFT’s customers are authenticated using its specialised security and identification technology.
- Its core role is to provide a secure transmission channel so that Bank A knows that its message to Bank B goes to Bank B and no one else.
- Bank B, in turn, knows that Bank A, and no one other than Bank A, sent, read or altered the message en route.
- Banks need to have checks in place before actually sending messages.
Source-The Hindu, Wiki, trolled many websites