Implementation of Basel II and Its Impact
A recent survey conducted by the Financial Stability Institute (FSI), Basel, showed that more than 100 countries would implement Basel II in the next few years. The US has already announced that it would he made mandatory for the ten biggest banking groups that control nearly three-fourth of the country’s banking assets. It is also expected that Basel II will also be implemented fully in Europe.
The Reserve Bank of India (RBI) started its own consultative process involving various banks and other experts. It has now come out with its final draft version of Basel II, which is to become operational from 2007.
The Basel II version as drafted by RBI in its letter dated 15 February 2005 is a comprehensive set of instructions, which will initiate a parallel run by banks starting in 2006.
The instructions go into great detail regarding the various classifications of the assets and the weights to be assigned.
What remains is for each bank to adopt one of the methods suggested in the circular for assessing its risk weighted capital.
In a meeting of 60 bankers that aimed at sensitising the bank chiefs about the challenges of Basel II norms, which are due to be implemented by March 2006 by all banks globally, the Deputy Governor of the Reserve Bank of India, Mr. K. J. Udeshi, announced that the RBI would adopt a gradual and sequential approach towards implementation of Basel II norms for the capital adequacy of banks.
At the meeting, the RBI has formed a Steering Committee, which in turn will have smaller focused sub-committees for each of the pillars of Basel II. The Steering Committee will review the issues and suggest a roadmap to adopt the new norms of Basel II. The Reserve Bank of India has advised Indian banks to adopt Basel II norms by 31 March 2006; however, banks are expected to do a trial or parallel run from 31 March 2005 to fine-tune their systems and procedures.
Once it is implemented, Basel II is likely to have a profound impact on the way banking is conducted worldwide. It could also lead to a shakeout in the industry given the fact that the capital requirements favouring larger banks with better systems in place. This could result in a spate of mergers worldwide, especially among internationally active banks in their struggle to remain competitive.
The implementation of Basel II is imperative in the context of emerging market economies that “may face unique problems in the absence of well-developed credit rating systems, robust data collection mechanisms and other infrastructure”.. This is one reason no country can afford to delay implementation of Basel II indefinitely.
A recent survey conducted by the Financial Stability Institute (FSI), Basel, showed that more than 100 countries would implement Basel II in the next few years. The US has already announced that it would he made mandatory for the ten biggest banking groups that control nearly three-fourth of the country’s banking assets. It is also expected that Basel II will also be implemented fully in Europe.
The Reserve Bank of India (RBI) started its own consultative process involving various banks and other experts. It has now come out with its final draft version of Basel II, which is to become operational from 2007.
The Basel II version as drafted by RBI in its letter dated 15 February 2005 is a comprehensive set of instructions, which will initiate a parallel run by banks starting in 2006.
The instructions go into great detail regarding the various classifications of the assets and the weights to be assigned.
What remains is for each bank to adopt one of the methods suggested in the circular for assessing its risk weighted capital.
In a meeting of 60 bankers that aimed at sensitising the bank chiefs about the challenges of Basel II norms, which are due to be implemented by March 2006 by all banks globally, the Deputy Governor of the Reserve Bank of India, Mr. K. J. Udeshi, announced that the RBI would adopt a gradual and sequential approach towards implementation of Basel II norms for the capital adequacy of banks.
At the meeting, the RBI has formed a Steering Committee, which in turn will have smaller focused sub-committees for each of the pillars of Basel II. The Steering Committee will review the issues and suggest a roadmap to adopt the new norms of Basel II. The Reserve Bank of India has advised Indian banks to adopt Basel II norms by 31 March 2006; however, banks are expected to do a trial or parallel run from 31 March 2005 to fine-tune their systems and procedures.
Once it is implemented, Basel II is likely to have a profound impact on the way banking is conducted worldwide. It could also lead to a shakeout in the industry given the fact that the capital requirements favouring larger banks with better systems in place. This could result in a spate of mergers worldwide, especially among internationally active banks in their struggle to remain competitive.
The implementation of Basel II is imperative in the context of emerging market economies that “may face unique problems in the absence of well-developed credit rating systems, robust data collection mechanisms and other infrastructure”.. This is one reason no country can afford to delay implementation of Basel II indefinitely.