The growing sophistication in banking operations, online electronic banking, improvements in information technology etc, have led to increased diversity and complexity of risks being encountered by banks. These risks can be broadly grouped into Credit Risk, Market Risk and Operational Risk. These risks are interdependent and events that affect one area of risk can have ramifications for a range of other risk categories.

 

Basel-I Accord: It was introduced in the year 2002-03, which covered capital requirements for Credit Risk. The Accord prescribed CRAR of 8%, however, RBI stipulated 9% CRAR. Subsequently, Banks were advised to maintain capital charge for Market Risk also.  

 

Basel-II New Capital Accord: Under this, banks have to maintain capital for Credit Risk, Market Risk and Operational Risk w.e.f 31.03.2007. The New Capital Accord rests on three pillars viz., Minimum Capital Requirements, Supervisory Review Process & Market Discipline. The implementation of the capital charge for various risk categories are Credit Risk, Market Risk and Operational Risk. Analysis of the bank’s CRAR under should be reported to the Board at quarterly intervals.

Internal Ratings Based (IRB) Approach: Under this approach, banks must categorise the exposures into broad classes of assets as Corporate, Sovereign, Bank, Retail and Equity. The risk components include the measures of the Probability of Default (PD), Loss Given Default (LGD), Exposure at Default (EAD) and Effective Maturity (M). There are two variants i.e Foundation IRB (FIRB) and Advanced IRB. Under FIRB, banks have to provide their own estimates of PD and to rely on supervisory estimates for other risk components (like LGD, EAD) while under Advanced IRB; banks have to provide their own estimates of all the risk components. It is based on the measures of Expected Losses (EL) and Unexpected Losses (UL). Expected Losses are to be taken care of by way of pricing and provisioning while the risk weight function produces the capital requirements for Unexpected Losses. 


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