1. What Are Basel Norms?

Basel Norms are international regulatory standards designed to make banks safer and more resilient. They mainly focus on the amount and quality of capital banks should maintain against the risks arising from their activities.

The standards are developed by the Basel Committee on Banking Supervision (BCBS).

• Basel standards focus strongly on bank capital and risk management.
• They promote stronger supervision of banks.
• They improve transparency and market discipline.
• They provide international minimum standards.
• Individual countries can adopt requirements that are more stringent than the Basel minimums.

2. Basel Committee on Banking Supervision (BCBS)

BCBS stands for Basel Committee on Banking Supervision.

It is the primary global standard setter for the prudential regulation of banks.

• It develops global standards for banking supervision.
• It promotes cooperation among banking supervisors.
• It develops minimum prudential standards.
• Basel standards are implemented through domestic regulatory frameworks.

3. History of Basel Accords

4. Basel I

Basel I was introduced in 1988 and initially concentrated mainly on credit risk.

Its major concept was the minimum capital requirement based on risk-weighted assets.

The original Basel I framework established a minimum total capital ratio of 8%.

5. Basel II

Basel II expanded the capital framework and introduced the famous Three Pillars.

The Three Pillars

1. Pillar 1: Minimum Capital Requirements
2. Pillar 2: Supervisory Review Process
3. Pillar 3: Market Discipline

Basel II made the capital framework more risk-sensitive and gave greater importance to supervisory review and disclosure.

6. Basel III

Basel III was developed after the global financial crisis of 2007–09. The crisis showed that some banks had insufficient high-quality capital, excessive leverage and liquidity weaknesses.

Basel III therefore strengthened:

• Quality of capital
• Quantity of capital
• Capital buffers
• Leverage control
• Liquidity management
• Risk coverage
• Transparency and disclosure

7. Objectives of Basel III

• Strengthen banks' ability to absorb losses.
• Improve the quality of regulatory capital.
• Reduce excessive leverage.
• Improve liquidity resilience.
• Reduce systemic risk.
• Improve risk management.
• Reduce the probability of banking crises.
• Make the financial system more resilient during economic stress.
• Promote stronger supervision and market discipline.

8. Regulatory Capital

Regulatory capital is the capital recognised by the banking regulator for assessing a bank's ability to absorb losses.

Under Basel III, regulatory capital is broadly divided into:

9. Common Equity Tier 1 (CET1)

CET1 stands for Common Equity Tier 1.

It is the highest-quality form of regulatory capital because it primarily consists of common equity and retained earnings that can absorb losses while the bank remains a going concern.

Typical CET1 Components

• Common shares meeting regulatory criteria
• Share premium associated with eligible common shares
• Retained earnings
• Eligible disclosed reserves
• Other eligible components after regulatory adjustments

10. Additional Tier 1 (AT1)

AT1 stands for Additional Tier 1.

AT1 instruments are part of Tier 1 capital but are different from CET1. They are designed to absorb losses on a going-concern basis and generally have features such as perpetual maturity and loss-absorption mechanisms prescribed by the regulatory framework.

11. Tier 2 Capital

Tier 2 is the second category of regulatory capital.

It is commonly described as gone-concern capital.

Depending on the applicable regulatory framework, eligible Tier 2 components can include qualifying subordinated instruments and other eligible items subject to regulatory conditions and limits.

12. Tier 1 vs Tier 2 Capital

13. Risk Weighted Assets (RWA)

RWA means Risk Weighted Assets.

Banks have assets with different levels of risk. A regulatory framework therefore does not simply treat every rupee of assets as equally risky. Assets and exposures are assigned risk weights or otherwise converted into risk-weighted exposure measures under the applicable framework.

Higher-risk exposures generally require more regulatory capital than lower-risk exposures.

Examples of Risk Consideration

• Government-related exposures may receive relatively low risk weights subject to applicable rules.
• Riskier corporate or other exposures may receive higher risk weights.
• Off-balance-sheet exposures can also create regulatory capital requirements.
• Credit, market and operational risks contribute to the regulatory capital framework.

14. CRAR / Capital Adequacy Ratio

CRAR stands for Capital to Risk-Weighted Assets Ratio.

It measures the amount of eligible regulatory capital maintained by a bank in relation to its risk-weighted assets.

A higher CRAR generally provides a larger capital cushion against unexpected losses, subject to the quality and composition of that capital.

15. Basel Minimum Capital Ratios

The Basel framework establishes minimum risk-based capital requirements. Under the Basel minimum framework:

16. Basel III Capital Requirements in India

RBI's Basel III capital regulations prescribe higher minimum capital requirements for applicable Scheduled Commercial Banks than the basic Basel minimum.

These figures relate to the applicable RBI Basel III capital framework; different categories of regulated entities can have different capital requirements.

17. Capital Conservation Buffer (CCB)

CCB stands for Capital Conservation Buffer.

It is an additional layer of high-quality capital designed to ensure that banks build capital during normal periods so that the buffer can be used during periods of financial stress.

The Basel standard CCB is 2.5% of RWA, composed of CET1 capital.

Purpose of CCB

• Build capital during normal periods.
• Provide a cushion during stress.
• Reduce the possibility of banks suddenly falling below minimum capital requirements.
• Strengthen the resilience of the banking system.

18. Countercyclical Capital Buffer (CCyB)

CCyB stands for Countercyclical Capital Buffer.

It is a macroprudential tool intended to address excessive credit growth and build additional capital during periods when systemic risks are increasing.

Unlike the fixed concept of the CCB, the countercyclical buffer can be activated or adjusted according to the financial cycle and systemic conditions.

19. G-SIBs and D-SIBs

G-SIB

G-SIB means Global Systemically Important Bank.

These are banks whose failure could have significant effects on the international financial system.

D-SIB

D-SIB means Domestic Systemically Important Bank.

These are banks whose failure could significantly affect the domestic financial system and economy.

Systemically important banks can be subject to additional loss-absorbing capacity or capital requirements depending on the applicable framework.

20. Leverage Ratio

The Basel leverage ratio is a non-risk-weighted backstop to the risk-based capital requirements.

It helps limit excessive build-up of leverage in the banking sector.

The Basel minimum leverage ratio is generally 3%.

21. Liquidity Coverage Ratio (LCR)

LCR stands for Liquidity Coverage Ratio.

It is designed to ensure that a bank has enough high-quality liquid assets to withstand a significant short-term liquidity stress scenario.

The Basel minimum LCR is 100%.

Key Term: HQLA

HQLA means High-Quality Liquid Assets.

These assets should be capable of being converted into cash quickly with little or no significant loss in value during a stress period.

22. Net Stable Funding Ratio (NSFR)

NSFR stands for Net Stable Funding Ratio.

NSFR promotes stable funding over a longer time horizon and reduces excessive reliance on unstable short-term funding.

The Basel minimum NSFR is 100%.

23. Three Pillars of the Basel Framework

24. Pillar 1 – Minimum Capital Requirements

Pillar 1 establishes the minimum regulatory capital requirements for major categories of risk.

Traditionally, the framework has focused on:

• Credit risk
• Market risk
• Operational risk

The Basel framework contains detailed methodologies for calculating regulatory capital and risk-weighted exposure amounts.

25. Pillar 2 – Supervisory Review

Pillar 2 focuses on the role of supervisors in assessing whether a bank has adequate capital relative to its overall risk profile.

It encourages banks to have strong internal capital assessment and risk management processes.

Important Concept: ICAAP

ICAAP means Internal Capital Adequacy Assessment Process.

It is a bank's internal process for assessing capital adequacy in relation to its risk profile.

26. Pillar 3 – Market Discipline

Pillar 3 strengthens market discipline through disclosures.

When banks disclose meaningful information about their capital, exposures and risk management, depositors, investors and other market participants can better evaluate the bank's risk profile.

• Improves transparency
• Improves comparability
• Supports informed market decisions
• Encourages prudent behaviour by banks

27. Major Risks Covered Under Basel Framework

28. Credit Risk

Credit risk is the possibility that a borrower, counterparty or obligor fails to meet its contractual obligations.

For banks, loans and advances are major sources of credit risk.

Risk-weighted capital rules require banks to hold capital in proportion to the riskiness of their exposures.

29. Market Risk

Market risk is the risk of losses arising from adverse movements in market factors.

• Interest rates
• Foreign exchange rates
• Equity prices
• Commodity prices
• Other market variables

30. Operational Risk

Operational risk arises from inadequate or failed internal processes, people and systems or from external events.

Examples

• Technology failure
• Internal fraud
• External fraud
• Cyber incidents
• Processing errors
• System outages
• Business disruption

31. Risk Weights

Risk weights are used to convert exposures into risk-weighted amounts for regulatory capital purposes.

The basic principle is:

The exact risk weight depends on the type of exposure and the applicable regulatory methodology.

32. Why Quality of Capital Matters

Basel III places greater emphasis on high-quality capital because a bank can have a large amount of nominal capital without necessarily having sufficient loss-absorbing capacity.

Common equity and retained earnings are generally more capable of absorbing losses than weaker forms of capital.

33. Important Basel Buffers

34. Basel III Final Reforms / Basel Framework

The term "Basel IV" is sometimes used informally to describe the final Basel III reforms, but the Basel Committee itself generally refers to these reforms as the finalisation of Basel III or part of the consolidated Basel Framework.

Important areas of the final reforms include:

• Revised credit risk framework
• Revised market risk framework
• Revised operational risk framework
• Output floor
• Changes to risk measurement and capital calculation
• Greater comparability of risk-weighted assets

Output Floor

The output floor limits the extent to which banks using internal models can reduce their risk-weighted assets compared with the standardised approach.

Under the final Basel III phase-in schedule, the output floor rises progressively and reaches 72.5% in 2028.

35. India-Specific Basel Exam Points

RBI implements prudential capital requirements for applicable Indian banks through its regulatory framework.

36. Important Basel Comparisons

Basel I vs Basel II vs Basel III

CRAR vs Leverage Ratio

LCR vs NSFR

37. Important Basel Formulas

38. Common Basel Norms Exam Traps

39. Basel Norms – 100 Rapid Revision Facts

40. Frequently Asked Questions on Basel Norms

41. SEO Keyword Map

42. Official Verification Sources

Banking capital requirements can change through RBI circulars, directions and amendments. Always verify current figures before using this page as a legal or regulatory reference.

• Reserve Bank of India – Basel III Capital Regulations
• Basel Committee on Banking Supervision – Basel Framework
• Bank for International Settlements – Basel III standards
• Department of Financial Services, Ministry of Finance – Banking sector information

43. Final Basel Norms Memory Chart

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