Option

A RTICLE N O.1

BASEL I TO BASEL II TO BASEL III: A RISK

MANAGEMENT JOURNEY OF INDIAN BANKS

Prof. Debajyoti Ghosh Roy

Adjunct Faculty, Symbiosis School of Banking Management, Pune

Dr.Bindya Kohli

Associate Professor, Symbiosis School of Banking Management, Pune

Prof. Swati Khatkale

Assistant Professor, Symbiosis School of Banking Management, Pune

Abstract:

Risk and returns are core pillars of Financial System and Banking Industry. Due to

basic business of lending & borrowing, banks have credit risk. Similarly due to treasury & investment

operations, market risk is inevitable. In 1988, BCBS has introduced first International Standards Basel

1 to manage Banking Risk with the help of standardized Capital Adequacy Ratio. CRAR ensures

minimum capital to cover depositors’ money from risky assets. But soon after various frauds & system

failures, it was found that operational risk is also a major risk. In Basel 2, apart from inclusion of

credit, market and operational risk; flexibility was introduced. Basel 2 had an array of approaches

from basic standardized approaches to advanced approaches to match the risk management level of

banks. In India, RBI has taken conservative approach and maintained even tougher standards than

Basel Norms. To absorb changes, RBI had introduced various approaches gradually in phases. But

internationally even Basel 2 could not prevent Subprime Mortgage Crises and failures like Lehman

Brothers. A few of the major problems were high leverage, asset liability mismatch and liquidity

crunch. To solve these issues in 2010, Basel 3 norms were introduced with liquidity Coverage Ratio,

Counter Cycle Buffer, Capital Conservation Buffer and Leverage Ratio. This paper shows the journey

of Indian Banks from Basel1 to Basel 3.

Key Words:

Basel 1, Basel 2, Basel3, Risk Management, Capital Adequacy Ratio, Credit Risk,

Market Risk, Operational Risk, Liquidity Risk, Counter Cycle Buffer, Leverage Ratio, Capital

Conservation...