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Basel III compliant bonds

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Basel III compliant bonds:


Context:

State Bank of India has raised ₹7,000 crore by issuing Basel III compliant bonds.

Key points:

  • Bonds issued qualify as tier II capital of the bank, and has face value of Rs 10 lakh each.
  • They bear coupon rate of 6.24 per cent per annum payable annually for a tenor of 10 years.
  • There is call option after 5 years and on anniversary thereafter. Call option means the issuer of the bonds can call back the bonds before the maturity date by paying back the principal amount to investors.

What are Basel guidelines?

Basel guidelines refer to broad supervisory standards formulated by group of central banks- called the Basel Committee on Banking Supervision (BCBS). The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial system are called Basel accord.

  • Basel is a city in Switzerland which is also the headquarters of Bureau of International Settlement (BIS).
  • The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

BASEL-I:

  • Introduced in 1988.
  • 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.

BASEL-II:

Published in 2004.

The guidelines were based on three parameters:

  • 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 to the central bank.

Basel III:

In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008.

  • 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.

InstaLinks:

Prelims Link:

  1. What are Basel norms?
  2. Where is Basel?
  3. Composition and functions of the Basel Committee on Banking Supervision (BCBS).
  4. About the Bureau of International Settlement (BIS).
  5. Overview of Basel norms 1,2 and 3.

Mains Link:

Discuss the significance of Basel Norms.

Sources: the Hindu.