Basel Accord & Implementation













 Regulatory Capital and its Functions


Capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. Capital is supposed to protect a bank from all sorts of uninsured and unsecured risks apt to turn into losses.

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 Regulatory Capital Standards in Pakistan


In Pakistan, banks, Development Finance Institutions (DFIs) and Microfinance Banks (MFBs) are required to comply with the following two capital standards.

  • Minimum Capital Requirement (MCR)
  • Capital Adequacy Ratio (CAR)

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 History of Basel Capital Framework


The Basel Capital Framework has its origins in the financial market turmoil that followed the breakdown of the Bretton Woods system of managed exchange rates in 1973. After the collapse of Bretton Woods, many banks incurred large foreign currency losses. On 26 June 1974, West Germany’s Federal Banking Supervisory Office withdrew Bankhaus Herstatt’s banking licence after finding that the bank’s foreign exchange exposures amounted to three times its capital.

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 Basel Capital Framework

  • Basel I

  • Basel II

  • Basel III

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 Implementation of Basel Capital Framework in Pakistan

Basel I: SBP implemented Basel I in 1997 vide BPRD Circular # 36 of November 4, 1997. However, these guidelines only accounted for credit risk faced by the banks. Subsequently, vide BSD Circular # 12 of August 25, 2004, another version of Basel I framework was introduced which included criteria for the calculation of risk weighted assets for market risk as well.

Basel II: SBP implemented Basel II in 2008 vide BSD Circular # 8 of June 27, 2006. The subject guidelines required the banks to calculate their risk based capital (CAR) against credit, market and operational risks under Pillar 1 whereas rest of the risks are to be covered under Pillar 2.

Basel III: SBP implemented Basel III in phased manner staring from December 31, 2013 to December 31, 2019 wherein CAR + CCB requirements are to be increased from 10% to 12.50% in a gradual manner. 

   
Frequently Asked Questions (FAQs)
FAQs for Basel III
FAQs for Basel II & MCR

 




       
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