3 pillars of basel iii

Basel 3 Pillars

1. 3Pillars of Basel III Presented By : Sabin Prajapati Neelam Kunwar Rachana Bista Kelsang Choedon Rina Adhikari Rajina Kaafle Sabina Gurung Saraswati Khadka Sabunam Shrestha Sabina Kumari Shah

2. Basel III Basel III is an international regulatory accord that introduced a set of reforms designed to improve the regulation, supervision and  risk management  within the banking sector.  The 3 pillars of Basel III are : Minimum capital r equirement Supervisory review process Market discipline

3. 1 st Pillar: Minimum capital Requirement The first pillar Minimum Capital Requirement is mainly for total risk including the credit risk, market risk as well as operational r isk . Banks' regulatory capital is divided into : Tier 1 / Regulatory Capital Tier 2 / Risk weighted assets

4. Basel III introduced two additional capital buffers: A mandatory "capital conservation buffer", equivalent to 2.5% of risk-weighted assets. Considering the 4.5% CET1 capital ratio required, banks have to hold a total of 7% CET1 capital ratio, from 2019 onwards. A " discretionary counter-cyclical  buffer", allowing national regulators to require up to an additional 2.5% of capital during periods of high credit growth. The level of this buffer ranges between 0% and 2.5% of RWA and must be met by CET1 capital.

5. Implementation First, the quality, consistency, and transparency of the capital base will be raised . Tier 1 capital: the predominant form of Tier 1 capital must be common shares and retained earnings Tier 2 capital: supplementary capital, however, the instruments will be harmonised Tier 3 capital will be eliminated

6. In Context Of Nepal According to the new capital adequacy framework 2007, Minimum capital requirements for Commercial Banks are: Tier I capital = 6% of RWE Total Capital= 10% of RWE These ratios are already higher than the global standard for capital adequacy prescribed by Basel II. Under Basel III, minimum Tier I capital should be 6% of RWE and there will not be necessity of any change in total capital requirements.

7. 2 nd Pillar : Supervisory review process) Piller II aims to ensure that the banks board and senior management retain the responsibility for developing and maintaining risk policies and internal controls and that it encourages the use of reporting tools and mechanisms to monitor/supervise institution-wide risks. Also central bank should consistently monitor the activities of every bank.

8. Principles of 2 nd pillar Board and senior management oversight Sound capital assessment Comprehensive assessment of risk Monitoring and reporting International control review Review of adequacy of risk assessment Assessment of capital adequacy Assessment of the control environment Supervisory review of compliance with minimum standards Supervisory response

9. 3 rd Pillar: Market Discipline Pillar 3 recognizes that market discipline has the potential to reinforce minimum capital standards (Pillar 1) and the supervisory review process (Pillar 2), and so promote safety and soundness in banks and financial systems. Market discipline refers to the way in which market participants influence a financial institution’s behavior through monitoring its risk profile and financial position. Anybody providing funds to a financial institution is an investor, from depositors to professional investors in sophisticated debt instruments .

10. Investors can exercise market discipline through the price they charge financial institutions for supplying funds, or simply by withdrawing their funds.

11. Condition for effective market condition Effective market discipline requires certain conditions to be in place. First, market participants need to have access to useful information. Second, market participants must be able to process that information, which means it must be accessible and meaningful. Third, market participants must have incentives to monitor banks. Some aspects of the regulatory framework, such as the Open Bank Resolution Policy (OBR) and no deposit insurance, reinforce these incentives. Measures to encourage greater financial education and awareness will also assist .

12. Finally, there must be the right mechanisms available for market participants to exercise market discipline. For most industries and in most circumstances within the financial services industry, market discipline will deliver, and historically has delivered, good outcomes. Very few people would wish to revert to a world where the banking system was directly controlled

13. Principle 1 – Disclosures should be clear Principle 2 - Disclosures should be comprehensive Principle 3 - Disclosures should be meaningful Principle 4: Disclosures should be consistent over time Principle 5: Disclosures should be comparable across banks Guiding principle

14. Refrences : https://www.nrb.org.np/bfr/circular / https:// www.investopedia.com/terms/b/basell-iii.asp https:// en.wikipedia.org/wiki/Basel_III https://www.gktoday.in/gk/three-pillars-of-basel-iii / https://www.bis.org/publ/bcbs128b.pdf