Header image alt text

Vidya Foundation Cochin

An educational charity to help poor students who are in need of support and motivation


1)     What is Basel 3 Accord or Meaning and Definition of Basel III Accord?

Basel III or Basel 3 released in December, 2010  is the third in the series of Basel Accords.  These accords deal with risk management aspects for the banking sector.   In a nut shell we can say that Basel iii is the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Supervision)  on bank capital adequacy, stress testing and market liquidity risk.   (Basel I and Basel II are the earlier versions of the same, and were less stringent)

What does Basel III is all about ?

According to Basel Committee on Banking Supervision “Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector”.

Thus, we can say that Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking Supervision to enhance the bankingregulatory framework under Basel I and Basel II.   This latest Accord now seeks to improve the banking sector’s ability to deal with financial and economic stress, improve risk management and strengthen the banks’ transparency.

What are the objectives / aims of the Basel III  measures ?

Basel 3 measures aim to:

  • improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source
  •   improve risk management and governance
  • strengthen banks’ transparency and disclosures.

 Thus we can say that Basel III guidelines are aimed at to improve the ability of banks to withstand periods of economic and financial stress as the new guidelines are more stringent than the earlier requirements for capital and liquidity in the banking sector.

How Does Basel III Requirements Will Affect Indian Banks :

The Basel III which is to be implemented by banks in India as per the guidelines issued by RBI from time to time, will be challenging task not only for the banks but also for GOI.  It is estimated that Indian banks will be required to rais Rs 6,00,000 crores in external capital in next nine years or so i.e. by 2020 (The estimates vary from organisation to organisation).   Expansion of capital to this extent will affect the returns on the equity of these banks specially public sector banks.  However, only consolation for Indian banks is the fact that historically they have maintained their core and overall capital well in excess of the regulatory minimum.

 2)     Role of CRR in Indian Economy?

The CRR is partly a prudential requirement for banks to maintain a minimum amount of cash reserves to meet their payments obligations in a fractional reserve system.
In the more recent period after 2004, when there was a huge influx of foreign capital through varied forms of debt and non-debt flows, and the RBI ended up accumulating large forex reserves, the CRR became an optional instrument to sterilise the rupee resources released from such dollar purchases. This was particularly enabled by not paying any interest on CRR balances maintained by banks with the RBI. The other options of sterilisation through open market operations and the repo operations through the liquidity adjustment window (LAF) cost the central bank, just as the market stabilisation scheme cost the Government fiscally in terms of interest payments.

The use of CRR as an instrument of sterilisation and also a monetary tool has gained ground again. At the same time, the ratio stands now at 4.25 per cent, the previous historic low. Since CRR acts as a tax that increases their transaction costs, banks in general would want its role to be restored to being a prudential minimum requirement of not more than 3 per cent.

3)    Hike in gold import tax?

As the current account deficit (CAD) hit a record 4.6% in the first half of the fiscal, a concerned government decided to clamp down on massive inflows of gold by raising the import duty on the “idle asset” for a third time in one year.

“As would be evident, gold imports constituted a substantial chunk of the imports and is a huge drain on the current account. Suppose gold imports had been one half of the actual level, that would have meant that our foreign exchange reserves would have increased by $10.5 billion. I would, therefore, appeal to the people to moderate the demand for gold, which leads to large imports of gold. I may add that we may be left with no choice but to make it a little more expensive to import gold. This matter is under the government’s consideration,” Chidambaram said on Wednesday.

The plan to hike the import duty again from the current 4%, which has effectively been raised four fold since last January, reflects the government’s growing uneasiness over large imports of an idle commodity-— unlike crude oil— worsening its current account, which comprises the balance of trade,

Although gold imports by India—the world’s biggest consumer—dropped 30% in the first half of the fiscal to $20.2 billion, it was still more than what the country had bought from overseas during the entire 2007-08 fiscal and slightly lower than $20.7 billion in 2008-09.

 4)     Libor Scandal?

LIBOR is actually relatively new for the financial industry and seldom discussed outside of the financial community. Yet, the daily LIBOR rates do have a world-wide influence in every person’s life as people apply for loans, business seed money, along with the potential solvency of their own banks. In order understand the rationale behind the record setting fine, it’s important to understand the history of LIBOR, what it does, and how it impacts you.

LIBOR is a concept that began in the mid-1980s when new products were introduced to the financial sector, including interest rate swaps, foreign currency options, and forward rate agreements. Seeing the opportunity and risks, the BBA (British Banker’s Association) partnered with organizations, including the Bank of England, to establish various working groups dedicated to develop measurement standards for the new product offerings thereby creating a clearinghouse for competitors to list their daily rates. The culmination of the London banking industry’s efforts is the LIBOR.

The BBA libor’s website posts a basic definition of LIBOR as, “The rate at which an individual contributor panel bank could borrow funds, were it to do so by asking for and then accepting interbank offers in reasonable market size, just prior to 11.00 am London time.”

Currently, the BBA, advised by the Foreign Exchange and Money Markets Committee, utilizes data from a reference panel of 6 to 18 contributor banks for each of the 10 currencies included in LIBOR calculations. The calculation is the mean of the 50% middle values of the panel banks and used as the daily benchmark for interbank lending. The actual trading rate does not necessarily mirror the LIBOR and will fluctuate throughout the trading day.

The LIBOR is used as a benchmark for a variety of financial transactions including, but not limited to, currency exchange rates and identifying potential liquidity challenges, both institutional and sovereign.

For example, when credit challenges hit some of the yen contributor banks in the 1990’s, the yen LIBOR took a hit. If a bank consistently posts LIBOR rates outside of the mean, analysts begin taking a closer look at the bank and speculation on liquidity problems starts to surface which can make it more difficult, and expensive, for an individual bank to conduct business with other banks.  A systemic failure raises the LIBOR and places additional stress on central banks which makes it more difficult for nations to conduct financial transactions with each other.

It’s also used in numerous institutional lending decisions and personal lending rates.  For example, the LIBOR dollar rate in the United States has as an index for ARM mortgages. GBP LIBOR has been used to index the UK’s ARM mortgage equivalent.

The recent fines Barclays received were in response to a lengthy investigation surrounding Barclays’ attempts to manipulate the LIBOR in their favor. This type of manipulation, if left alone, has a major impact on the overall stability of the banking system and, eventually, filters down to each citizen in the form of the availability of loans along with the rates we are charged.

Had Barclays chosen to stick with the three principles of their Quaker founders, honesty, integrity, and plain dealing, they would not have found themselves in the cross-hairs of a multi-national investigation and nearly $1/2 billion in fines.

5)     What is Capital Adequacy Ratio?

This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.

Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.

A measure of a bank’s capital. It is expressed as a percentage of a bank’s risk weighted credit exposures.

Also known as “Capital to Risk Weighted Assets Ratio (CRAR).”

 6)           Who is appointed as the new RBI deputy governor?

Urjit Patel has been appointed as a deputy governor of the Reserve Bank of India (RBI), banking secretary D.K. Mittal toldReuters on Wednesday.

Patel will replace Subir Gokarn, who was heading the monetary policy department, among others in the central bank.

Prior to his appointment, Patel was an adviser in the Boston Consulting Group.

 7)     Whats is the new rate cut by HDFC Bank?

HDFC Bank Ltd, the country’s second largest private sector, reduced its minimum lending rate or base rate by 10 basis points (bps) to 9.7% effective Monday. One bps is 0.01 percentage point.

The benchmark prime lending rate (BPLR), the main rate for the bank’s old borrowers, has also been cut by 10 bps to 18.2%.

HDFC Bank’s move comes a little less than a month before the Reserve Bank of India’s quarterly policy review, which is due on 29 January. HDFC Bank’s private sector rival ICICI Bank Ltd’s base rate is 9.75% and was last changed on 23 April 2012.

HDFC Bank stock was down 0.32% at Rs.675 per share, even as the benchmark 30-share Sensex was down 0.06% at 19,433 points at 02:10pm.