Indian Banks and Basel-II: An Econometric Analysis

Abstract

BASEL norms are a set of international banking regulations put forth by the Basel Committee on Banking Supervision. The first accord was the Basel I. It was issued in 1988 and set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally were required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets. Basel I focused mainly on credit risk by creating a bank asset classification system. Assets of banks were classified and were grouped in five categories according to credit risk and were assigned risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (as an example, most corporate debt). Ever since its introduction in 1988, capital adequacy ratio has become an important benchmark to assess the financial strength and soundness of banks. It has been successful in enhancing competitive equality by ensuring level playing field for banks of different nationality. Reserve Bank of India introduced risk assets ratio system as a capital adequacy measure in 1992, in line with the capital measurement system introduced by the Basel Committee in 1988, which takes into account the risk element in various types of funded balance sheet items as well as non-funded off-balance sheet exposures. Capital adequacy ratio is calculated on the basis of various degrees of risk weights attributed to different types of assets.