UPSC Prelims 2015 Q65: Indian Economy – Banking & Financial Sector
'Basel III Accord' or simply 'Basel III', often seen in the news, seeks to
- (a) develop national strategies for the conservation and sustainable use of biological diversity
- (b) improve banking sector's ability to deal with financial and economic stress and improve risk management
- (c) reduce the greenhouse gas emissions but places a heavier burden on developed countries
- (d) transfer technology from developed countries to poor countries to enable them to replace the use of chlorofluorocarbons in refrigeration with harmless chemicals
Answer: (b) improve banking sector's ability to deal with financial and economic stress and improve risk management
Explanation
Basel III Accord
Basel III is a set of banking rules framed by the Basel Committee on Banking Supervision after the 2008 financial crisis.
The Committee sits at the Bank for International Settlements, in Basel, Switzerland.
| Pillar of Basel III | Detail |
|---|---|
| More and better capital | Higher capital adequacy; a capital conservation buffer |
| Leverage ratio | Limits total borrowing |
| Liquidity rules | Liquidity Coverage Ratio and Net Stable Funding Ratio |
| Counter-cyclical buffer | Extra capital built in good times |
The options checked:
| Option | Actual agreement |
|---|---|
| (a) Conservation of biological diversity | Convention on Biological Diversity |
| (b) Banking sector's ability to deal with stress | Basel III |
| (c) Reduce greenhouse gas emissions | Kyoto Protocol |
| (d) Replace chlorofluorocarbons | Montreal Protocol |
Answer: (b) improve banking sector's ability to deal with financial and economic stress.
Why each option is right or wrong
- (a) Incorrect. Biological diversity is covered by the Convention on Biological Diversity.
- (b) CORRECT. Basel III improves the banking sector's ability to face stress and manage risk.
- (c) Incorrect. Cutting greenhouse gas emissions is the aim of the Kyoto Protocol.
- (d) Incorrect. Replacing chlorofluorocarbons is the aim of the Montreal Protocol.
Key point
Basel III (after 2008): stronger bank capital, leverage ratio, liquidity ratios (LCR, NSFR), buffers; framed by the Basel Committee at the BIS.
Remember
Basel III = stronger banks after 2008.
Common mistakes
- Confusing Basel norms (banking) with the Basel Convention (hazardous waste).
- Thinking Basel III is a treaty; it is a set of agreed standards.
- Forgetting that the RBI sets a higher capital ratio than the Basel minimum.
Exam tip
Basel Accord = banks. Basel Convention = hazardous waste. Same city, different subjects.
Sources
- Bank for International Settlements — Basel III: international regulatory framework for banks
- Reserve Bank of India — Master Circular on Basel III Capital Regulations