Basel Accords were issued by Basel Committee of Banking Supervision by international co-operation and agreement and aimed to set norms for minimizing capital and operational risks faced by banks all over the world. Basel II norms were first published in June 2004 and aimed at control as well as management of external and internal risks. The ideas was to come up with an international standard for how much capital a bank should keep aside to guard against any sudden market or operational risk.
When banks fails to keep a minimum amount aside it can lead to total collapse which will adversely affect world economy starting a chain reaction around the globe. It is precisely to protect against such economic and financial crisis on a global scale with potential for bankrupting entire nations, Basel II norms were agreed upon. The main objectives were to ensure risk sensitive capital allocation, separation of credit and operational risks, quantifying such risks and to minimize scope for regulatory arbitrage. Basel III is the updated and latest version of Basel Accords which are yet to be published.
Uncertainties and risk cannot be avoided in any sphere of life, business and financial world is not an exception to this rule. A business cannot grow without undertaking risks. Greater the risk attached with a venture more chances of it raking in huge profits in the end. Greater risks can also mean greater losses on the other hand. There has to be a fine balance between risk and rewards to survive in todays business world which is a fiercely competitive arena. Risk management therefore entails proper identification, effective control and efficient management of both internal and external risks. Basel II norms seek to do just that.
Mr. Sukanta Nag, Executive Vice President of CARE Ratings, emphasized the importance of efficient risk management in finance and banking sector at a seminar recently. The seminar organized by Bengal Institute of Business Studies focused on the challenges facing Indian banking sector in the new decade and how the nations finance sector collectively proposes to overcome them. He opined that one of the major reasons behind Indian banks and finance organizations emerging virtually unscathed from global recession and economic crisis was the regulatory role played by RBI as well as adherence to Basel II norms. Recent economic recession has indeed proved the need for more pro-active regulatory bodies like RBI as in case of India to ensure transparency, integrity and ethical practices in the finance and business world.
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