Basel Norms in Banking: Banks play a central role in the economy by mobilizing deposits and lending to individuals, businesses, and governments. However, lending exposes them to a variety of risks, such as default, liquidity shortfalls, and sudden market shocks. If banks fail, the entire financial system can collapse, as seen during the 2008 global financial crisis.
To ensure stability, the Basel Committee on Banking Supervision (BCBS) introduced a set of international banking regulations known as Basel Norms or Basel Accords. These norms define how much capital banks must maintain and how they should manage risks. Over the years, three sets of accords: Basel I, Basel II, and Basel III—have been introduced.
What are Basel Norms?
Basel Norms are global regulatory standards developed to strengthen the banking sector. They set out requirements for capital adequacy, risk management, supervision, and disclosure. The aim is to:
- Protect depositors and the financial system.
- Ensure banks have sufficient capital to absorb shocks.
- Promote transparency and discipline in the banking sector.
- Create uniformity in banking regulations across countries.
The Basel Committee on Banking Supervision (BCBS)
In simple terms, Basel Norms are global safety measures for banks to avoid crises. The BCBS is the standard-setting body behind Basel Norms.
- Established in 1974 by the central bank governors of the Group of Ten (G-10) countries.
- Housed in the Bank for International Settlements (BIS) in Basel, Switzerland.
- Expanded in 2009 and 2014; now includes 45 members from 28 jurisdictions, consisting of central banks and banking regulators.
- Provides a platform for cooperation and exchange of best practices in bank supervision.
- Its primary objective is to improve the quality of banking supervision worldwide and enhance financial stability.
Why Are Basel Norms Needed?
Banks use both depositors’ money and funds from the market to provide loans. This lending is always risky. Some borrowers may default, some assets may lose value, and sudden economic downturns may destabilize the entire banking system.
Without proper regulation, banks may lend excessively, rely too much on short-term funds, or take on high-risk assets, creating systemic risks. Basel Norms ensure:
- Banks maintain minimum levels of capital as a cushion.
- Risks such as credit, market, and operational risks are monitored.
- Banks remain solvent and liquid during stressful situations.
Why the Name “Basel”?
The name originates from Basel, Switzerland, where the Bank for International Settlements (BIS) is headquartered. The BIS was founded in 1930 to promote cooperation among central banks. The Basel Committee operates from the BIS offices; hence, the norms are named after Basel City.
Evolution of Basel Norms
The Basel Norms did not emerge overnight; they evolved in response to weaknesses in the global financial system. Basel I focused on credit risk, Basel II expanded the framework to include operational and market risks, and Basel III was developed after the 2008 financial crisis to strengthen resilience against systemic shocks. This progressive evolution shows how global banking supervision adapts to changing realities.
Basel I – 1988
- Focus: Credit Risk (the risk of borrower default).
- Introduced the concept of Risk-Weighted Assets (RWA).
- Banks are required to maintain a minimum capital adequacy ratio (CAR) of 8% of RWA.
- Simpler in design; aimed at harmonizing global capital standards.
- India adopted Basel I in 1999.
Basel II – 2004
Basel II was more refined and comprehensive. It was based on the Three Pillars Framework:
- Capital Adequacy: Banks must hold at least 8% capital against risk-weighted assets. Risks covered included credit risk, market risk, and operational risk.
- Supervisory Review: Regulators were empowered to review banks’ risk management practices and strategies.
- Market Discipline: Greater transparency was mandated through disclosure requirements. Banks needed to publish their risk exposures and capital adequacy to improve discipline.
Though widely accepted, Basel II was not fully implemented globally before the 2008 financial crisis, which exposed its shortcomings.
Basel III – 2010
Introduced after the 2008 financial crisis, Basel III aimed to make banks more resilient. It addressed the weaknesses of Basel II and focused on four critical parameters:
- Capital Requirements
- Minimum Capital Adequacy Ratio (CAR): 12.9%.
- Tier 1 Capital Ratio: 10.5% of RWA.
- Tier 2 Capital Ratio: 2% of RWA.
- Capital Conservation Buffer (CCB): 2.5%.
- Counter-Cyclical Capital Buffer (CCCB): 0–2.5%, depending on economic conditions.
- Leverage Ratio
- Minimum of 3%.
- Ratio of Tier 1 capital to total consolidated assets.
- Liquidity Coverage Ratio (LCR)
- Banks must maintain a stock of high-quality liquid assets to survive a 30-day stressed scenario.
- Net Stable Funding Ratio (NSFR)
- Banks must maintain stable funding over a 1-year horizon.
- Minimum NSFR requirement: 100%.
India extended the Basel III implementation deadline several times, most recently during the COVID-19 pandemic.
Important Concepts under Basel III
Basel III is not just about capital adequacy; it also introduced new concepts like liquidity coverage, leverage ratio, and countercyclical buffers. These measures were designed to ensure that banks could withstand both short-term liquidity shocks and long-term funding challenges. The focus was on preventing a repeat of the financial meltdown of 2008, when banks had relied excessively on short-term borrowing and risky assets.
Bank Run
A bank run occurs when a large number of depositors withdraw their funds simultaneously due to concerns about the bank’s solvency. Basel III’s liquidity standards (LCR and NSFR) aim to prevent such situations.
Countercyclical Capital Buffer (CCCB)
- Requires banks to hold extra capital in good times when lending is high.
- This buffer can be reduced during economic downturns to support lending.
- RBI has kept the CCCB requirement at 0% in India since its proposal in 2015.
Tier 1 and Tier 2 Capital
Capital in banking is classified into two tiers because not all funds have the same level of reliability. Tier 1 capital, which includes equity and reserves, is considered the strongest form of protection against losses. Tier 2 capital, on the other hand, is supplementary and less dependable but still provides an additional layer of security. Understanding the difference between these two is critical for evaluating a bank’s financial health.
| Category | Description | Reliability |
| Tier 1 Capital | Core capital such as equity and disclosed reserves. | High – provides main cushion against losses. |
| Tier 2 Capital | Supplementary capital such as subordinated debt and reserves. | Lower – less reliable, used after Tier 1 is exhausted. |
Comparison of Basel I, II, and III
The three Basel accords are interconnected stages of reform, each addressing shortcomings of the previous one. Basel I laid the foundation with basic capital rules, Basel II added depth by emphasizing supervisory review and market discipline, and Basel III further reinforced stability with liquidity and leverage measures. A comparative view highlights how these accords built upon each other to create a robust regulatory system.
| Feature | Basel I (1988) | Basel II (2004) | Basel III (2010) |
|---|---|---|---|
| Focus | Credit risk | Credit, market, and operational risks | Capital, leverage, liquidity, systemic risk |
| Minimum CAR | 8% of RWA | 8% of RWA | 12.9% (incl. buffers) |
| Key Approach | Risk weights for assets | Three Pillars Framework | Enhanced capital, liquidity, leverage |
| Transparency | Limited | Disclosure norms introduced | Greater emphasis |
| Motivation | Harmonization of capital rules | Better risk management | Post-2008 crisis reforms |
Basel Norms in India
India, being an important emerging economy, has actively implemented Basel Norms to strengthen its banking sector and maintain credibility in the global financial system. The Reserve Bank of India (RBI) has played a key role in ensuring compliance and often prescribes stricter standards than the global minimum to safeguard against risks.
Basel I in India
- Adopted in 1999.
- Indian banks were required to maintain a minimum Capital Adequacy Ratio (CAR) of 8% of risk-weighted assets.
- RBI, however, mandated a stricter requirement of 9%, higher than the international standard.
- This was to ensure greater safety for depositors and resilience in the Indian banking system.
Basel II in India
- Implementation began in 2007.
- Covered credit, operational, and market risks.
- Initially applied to foreign banks operating in India and Indian banks with an international presence, it was later extended to all scheduled commercial banks.
- Indian banks were required to comply with the standardized approach for credit risk and the basic indicator approach for operational risk.
- Full compliance is still evolving, but disclosure norms and supervisory review practices have strengthened risk management.
Basel III in India
- Announced by RBI in 2010 following global adoption.
- Original deadline: March 2019, later extended to March 2020 due to challenges in capital raising.
- Further extended in light of the COVID-19 pandemic.
- RBI mandated a minimum CAR of 9%, higher than the Basel III global requirement of 8%.
- Additional requirements such as the Capital Conservation Buffer (2.5%) and the Leverage Ratio (minimum 4.5% for Indian banks) were introduced.
- Liquidity norms like the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are being phased in gradually.
Key Takeaway
India not only adopted Basel Norms but also imposed stricter capital adequacy requirements than the global standards. This conservative approach has helped Indian banks remain relatively stable compared to their global counterparts during financial crises.
Why Basel Norms are Important for Bank Exam Aspirants?
Basel Norms form the backbone of banking regulation and risk management, making them a crucial topic for competitive exams like SBI PO, RRB, IBPS PO, SEBI, RBI Grade B, EPFO, and even UPSC. Questions often test candidates’ awareness of financial stability measures, capital adequacy ratios, and the evolution of Basel I, II, and III. A strong understanding of these norms helps aspirants link theory with practical aspects of banking.
- Frequently asked in banking awareness and economy sections of exams.
- Helps understand capital adequacy ratio (CAR), Tier 1 & Tier 2 capital, RWA, LCR, and NSFR.
- Important for explaining banking stability and financial crisis prevention.
- Direct questions on Basel I, II, III differences are common.
- RBI’s role in implementing Basel Norms in India is exam-relevant.
- Provides clarity on risk management and regulatory framework, useful for descriptive answers.
FAQs
Basel Norms are international banking regulations introduced by the Basel Committee on Banking Supervision (BCBS) to strengthen the global financial system by ensuring banks maintain adequate capital and manage risks effectively.
The Basel Norms were introduced by the BCBS, set up in 1974 under the Bank for International Settlements (BIS). They were created to bring uniformity in banking regulations across countries and to safeguard banks against financial crises.
They ensure banks have enough capital to absorb losses, manage risks, prevent bank failures, and maintain trust in the financial system. They also promote stability and transparency in global banking.
The three basel accords are:
Basel I (1988): Focused on credit risk; minimum capital requirement of 8% of risk-weighted assets.
Basel II (2004): Introduced the Three Pillars Framework (Capital Adequacy, Supervisory Review, Market Discipline).
Basel III (2010): Strengthened norms post-2008 crisis with stricter capital, leverage, and liquidity requirements.
Under Basel III, banks must maintain a CAR of 12.9%, which includes Tier 1 capital, Tier 2 capital, and a capital conservation buffer.
The difference between Tier 1 and Tier 2 Capital are:
Tier 1 capital: Core capital such as equity and reserves; the most reliable form of capital.
Tier 2 capital: Supplementary capital such as subordinated debt and reserves; less reliable and used after Tier 1 is exhausted.
Liquidity Coverage Ratio (LCR): Requires banks to hold enough high-quality liquid assets to survive a 30-day stress scenario.
Net Stable Funding Ratio (NSFR): Ensures banks maintain stable funding over a one-year horizon.
It is an additional capital requirement imposed during periods of high credit growth to protect banks from potential losses during downturns. In India, the CCCB has been kept at 0% since 2015.
The basel norms adopted by India are as follows:
Basel I adopted in 1999 with a stricter 9% CAR.
Basel II implemented in phases from 2007.
Basel III introduced by RBI in 2010, with deadlines extended to 2020 due to COVID-19.
Basel Norms are a core part of banking awareness. Questions on CAR, Basel I–III, Tier capital, LCR, NSFR, and RBI’s implementation appear frequently in SBI PO, IBPS PO, RRB, RBI, SEBI, and UPSC exams.
- Banking KYC Norms in India: Documents, Rules & Objectives
- Anti-Money Laundering (AML) Laws in India & Global Framework
- Direct Benefit Transfer (DBT) in India: Objectives, Schemes & Role
- NBFC’s Structure, Functions, and Regulations
- Homonyms & Homophones, Types of Questions Asked on This Topic
- Synonyms and Antonyms, Types of Questions Asked on This Topic
Hi, I’m Tripti, a senior content writer at Oliveboard, where I manage blog content along with community engagement across platforms like Telegram and WhatsApp. With 3+ years of experience in content and SEO optimization related to banking exams, I have led content for popular exams like SSC, banking, railways, and state exams.