Global efforts for financial stability have picked up after the 2008 global economic crisis, but anxieties about such a crisis, and the organisations for promotion of financial stability, have existed since much before. These organisations facilitate cooperation between governments and central banks with the aim to avert or reduce the likelihood and negative impact of another financial crisis.
Bank for International Settlements (BIS)
Headquarters: Basel, Switzerland.
The Bank for International Settlements (BIS) is the world’s oldest international financial organisation, and fosters cooperation among central banks with a common goal of financial stability and common standards of banking regulations. It hosts the Basel Committee on Banking Supervision (BSBS), and also the Financial Stability Board.
Basel Committee on Banking Supervision (BCBS)
BCBS is a distinct entity from the BIS, but is housed in the BIS complex and works closely with it. Countries across the world come together at BCBS to create a set of agreements popularly known as the Basel Accords. BIS and BCBS have also jointly created the Financial Stability Institute to foster closer cooperation between the central banks of all the countries.
Basel Accords/ Norms
The Basel Accords are global, voluntary regulatory framework on bank capital adequacy and financial stability. They include norms recommended to be followed by banks of all the countries so as to promote global financial stability. So far, three basel accords have been issued. India adopted Basel I norms in 1999, and Basel II norms in 2009.
Basel III (or Basel 3) norms are being implemented by Indian banks under the regulations issued by the Reserve Bank of India. These norms include provisions such as:
- Enhanced minimum capital and liquidity requirements.
- Capital adequacy ratio (CAR) – minimum 8%.
- Enhanced supervisory review process for firm-wide risk management and capital planning.
- Enhanced risk disclosure and market discipline.
Tier 1 and Tier 2 capital: Tier 1 capital is the core capital, the primary funding source of a bank, and consists of shareholders’ equity and retained earnings. Tier 2 is a bank’s supplementary capital, and includes undisclosed reserves, subordinated term debts, and other items. Tier 2 capital is less reliable, more difficult to accurately calculate and liquidate. A bank’s total capital is calculated by adding its Tier 1 and Tier 2 capital. Under Basel III, a bank’s tier 1 and tier 2 assets must be at least 10.5% of its risk-weighted assets, up from 8% under Basel II. Source: Investopedia.
G20 is an international forum for the governments and central bank governors from 20 major economies, to discuss policy issues pertaining to the promotion of international financial stability. It was founded in 1999, and its membership includes 19 individual countries and the European Union (EU).
Financial Stability Board (FSB)
Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. It is affiliated to G20, and is hosted by the Bank for International Settlements (BIS). It was established in 2009 in the aftermath of the 2008 global financial crisis.