BASEL Norms| CAR| Basel i, Basel ii & Basel iii | Learn in less than 10 min

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3 Sept 202213:22

Summary

TLDRThe video discusses the history and importance of banking, focusing on the role of the Basel Committee on Banking Supervision. It delves into topics like capital adequacy, liquidity coverage, and net stable funding ratios, emphasizing the need for banks to maintain sufficient capital and liquidity to ensure financial stability.

Takeaways

🏦 The script discusses the history of banking and the establishment of the Basel Committee on Banking Supervision in 1974, highlighting its importance in setting banking standards.
📈 It emphasizes the concept of capital adequacy, explaining how banks must maintain a certain level of capital to cover potential losses and ensure financial stability.
📊 The importance of liquidity is stressed, with the script detailing the Basel III standards and the need for banks to have sufficient liquid assets to meet short-term obligations.
🏢 The script mentions the role of the supervisory review process in ensuring that banks have effective risk management practices in place.
💡 It touches on the topic of leverage, explaining how high levels can pose risks to banks and the financial system, and the measures taken to control it.
📝 The script provides insights into the types of capital that banks are required to hold, distinguishing between common equity and other forms of capital.
🔢 It discusses the calculation of capital ratios, including the Tier 1 capital ratio, and the implications of these ratios for bank operations and stability.
🏛 The role of regulatory authorities in enforcing banking standards and the consequences for banks that fail to comply are outlined.
🌐 The script highlights the international nature of banking and the need for global cooperation in setting and enforcing banking standards.
🏚️ It discusses the impact of the financial crisis on banking regulations, particularly the introduction of new capital and liquidity requirements post-crisis.
📈 The script also covers the topic of derivatives and the risks associated with their trading, as well as the regulatory measures in place to mitigate these risks.

Q & A

What is the main topic discussed in the video?
-The main topic discussed in the video is banking, focusing on a very important topic, and the script mentions the history of banking, the establishment of the Basel Committee on Banking Supervision, and the importance of capital adequacy ratios.
What was the purpose of establishing the Basel Committee on Banking Supervision?
-The Basel Committee on Banking Supervision was established to set up a framework for international banking regulations, ensuring the stability and integrity of the global financial system.
What does the term 'Basel I' refer to in the context of the video?
-1988 guidelines of the Basel Committee on Banking Supervision, which focused on the minimum capital requirements for banks.
What is the significance of 'Tier-1 capital' in banking?
-Tier-1 capital is a measure of a bank's financial strength and is the core capital that includes common equity and disclosed reserves, which is crucial for absorbing losses without the bank becoming insolvent.
What is the role of 'Tier-2 capital' in a bank's capital structure?
-Tier-2 capital includes subordinated debt and other instruments that can absorb losses if the bank faces financial stress, supplementing the bank's capital base and providing a buffer against potential losses.
What does the term 'leverage ratio' refer to in the video?
-The leverage ratio in the video refers to a measure of a bank's assets in relation to its equity, indicating the degree of leverage employed by the bank and a key indicator of its financial stability.
How does the script mention the importance of liquidity in banking?
-The script mentions liquidity in the context of liquidity coverage ratios and net stable funding ratios, emphasizing the need for banks to maintain sufficient liquid assets to meet short-term obligations and long-term structural funding needs.
What is the significance of the 'risk-weighted assets' mentioned in the video?
-Risk-weighted assets are assets that are assigned weights based on their risk profile, and they are used to calculate the capital a bank needs to hold against potential losses, ensuring that the bank is adequately capitalized to cover the risks it takes.
What does the term 'Common Equity Tier 1 (CET1)' represent in the video?
-Common Equity Tier 1 (CET1) represents the highest quality of capital that a bank can hold, consisting of common shares and retained earnings, and it is the primary measure of a bank's financial strength.
How does the video script discuss the impact of the financial crisis on banks' capital adequacy?
-The script discusses the impact of the financial crisis by mentioning how banks faced challenges in maintaining their capital adequacy ratios, leading to regulatory changes and increased focus on capital conservation and countercyclical buffers.
What is the role of 'countercyclical capital buffers' in the banking system as discussed in the video?
-Countercyclical capital buffers are additional capital that banks are required to hold during periods of high credit growth to protect against the risk of future downturns, helping to smooth the financial cycle and prevent excessive risk-taking.

Outlines

00:00

🏦 Banking History and Capital Adequacy

The first paragraph delves into the history of banking and the importance of capital adequacy. It mentions the establishment of the Basel Committee on Banking Supervision in Switzerland in 1931 and its role in setting international standards for financial institutions. The paragraph also discusses the evolution of banking norms, the formation of the Committee in 1974, and the introduction of the Basel I framework. It highlights the committee's focus on risk management and the need for banks to maintain a certain level of capital to ensure stability and protect against financial crises.

05:01

📊 Capital Adequacy Ratios and Risk Management

The second paragraph continues the discussion on capital adequacy, focusing on the Capital Adequacy Ratio (CAR) and its significance in banking. It explains the concept of equity capital and the different types of capital that banks must maintain to protect against potential losses. The paragraph also touches on the challenges faced by banks, such as credit risk and market risk, and the measures taken to mitigate these risks, including the implementation of Basel II and Basel III frameworks. It emphasizes the importance of maintaining a balance between risk-taking and risk management for the stability of the financial system.

10:02

🔢 Tier-1 Capital and Liquidity Coverage

The third paragraph discusses the specifics of Tier-1 capital and the introduction of new research and liquidity coverage ratios. It explains the requirement for banks to hold a certain percentage of their capital in the form of common equity, which is considered the highest quality of capital. The paragraph also addresses the need for banks to maintain a buffer of additional capital to absorb losses during times of financial stress. It further elaborates on the concept of liquidity coverage and the importance of having sufficient liquid assets to meet short-term obligations, as well as the role of regulatory bodies in ensuring compliance with these standards.

Mindmap

Keywords

💡Banking

Banking refers to the activity of accepting deposits from the public and lending those funds out to borrowers. It is central to the video's theme as it discusses various banking concepts and their importance in financial management. For example, the script mentions 'Banking Super Vision' and the establishment of a committee related to banking practices.

💡Capital Adequacy

Capital Adequacy is a measure of a bank's ability to absorb shocks and maintain stable operations. It is a key concept in the video, which discusses the requirements for banks to hold a certain amount of capital to cover potential losses. The script refers to 'Tier-1 capital' and the need for banks to maintain a certain percentage of it as part of their capital adequacy.

💡Liquidity Coverage Ratio (LCR)

The Liquidity Coverage Ratio is a regulatory measure that ensures banks have sufficient high-quality liquid assets to withstand a 30-day liquidity stress scenario. In the script, LCR is mentioned as a part of the new research and regulatory standards that banks must adhere to, emphasizing the importance of liquidity in banking operations.

💡Deposits

Deposits are funds placed with a bank with the agreement that they will be repaid with interest. The script discusses the role of deposits in banking, such as 'depositing money' and the importance of managing deposit liabilities to ensure the bank's liquidity and solvency.

💡Loan

A loan is a sum of money that is borrowed and expected to be paid back with interest. The video script touches on various aspects of loans, including the risk associated with different types of loans and how banks assess and manage credit risk.

💡Risk Management

Risk management in the context of banking involves the identification, assessment, and prioritization of risks followed by coordinated efforts to minimize, monitor, and control the probability or impact of unfortunate events. The script refers to risk management in relation to loans and the importance of assessing the riskiness of different loan types.

💡Regulatory Bodies

Regulatory bodies are organizations that establish and enforce rules and standards for various industries, including banking. In the script, the establishment of a committee by the 'Governor' is mentioned, which is likely a regulatory body overseeing banking operations.

💡Financial Institution

A financial institution is an entity that provides financial and banking services to individuals and businesses. The script refers to the 'biggest financial institution' and the role of such institutions in the economy, emphasizing their importance in the financial system.

💡Interest Rate

The interest rate is the percentage of a loan or deposit that a lender charges or pays the borrower or depositor. It is a fundamental concept in banking and finance, and the script discusses how interest rates are assigned to different types of loans and their impact on the economy.

💡Credit Risk

Credit risk is the risk that a borrower will default on their loan obligations. The script mentions 'credit risk' in the context of banks lending money and the importance of managing this risk to ensure the bank's financial stability.

💡Derivatives Market

The derivatives market is a financial market for derivative contracts, which are financial instruments whose value depends on the value of underlying assets. The script briefly touches on the derivatives market as an area where banks may invest, highlighting the complexity and risk associated with such investments.

Highlights

Introduction to the history of banking and its evolution.

The establishment of Basel, Switzerland as a significant financial institution in 1931.

Formation of a committee by Governor Every Weekend to address banking supervision.

Discussion on the importance of understanding the concept of capital adequacy.

The role of the Right Side Committee in banking and its objectives.

Explaining the concept of Basel I and its significance in banking supervision.

Importance of housing loan rates and their impact on the economy.

Different types of loans and their respective weights in banking.

The impact of the 2008 financial crisis on banking regulations and capital adequacy.

Introduction of Basel II and its focus on operational and market risks.

The concept of liquidity coverage and its importance in banking stability.

Discussion on the types of equity and their role in a bank's capital structure.

The introduction of Basel III and its emphasis on improving bank resilience.

Explaining the tier-1 capital and its significance in a bank's capital adequacy.

The role of common equity in absorbing losses and its importance.

Discussion on the conservation buffer and its purpose in banking.

The impact of credit risk on banks and the measures taken to mitigate it.

Introduction of the countercyclical buffer and its role in economic stability.

The importance of understanding the total capital and its components.

Discussion on the role of derivatives in the banking sector and their risks.

The concept of net stable funding and its significance for long-term bank health.

Conclusion emphasizing the importance of continuous learning and adaptation in banking.