Three pillars of Basel

Indian Economy glossary

Also called: Pillar 1, Pillar 2, Pillar 3 · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

The three pillars are the framework introduced by Basel II (2004). Basel III kept this framework.

  • Pillar 1 (minimum capital): banks must hold minimum capital against credit, market and operational risk. They can measure these risks with a standardised approach or with their own internal ratings.
  • Pillar 2 (supervisory review): each bank assesses its own risks and capital needs through its ICAAP (Internal Capital Adequacy Assessment Process). The regulator then checks it. In India, RBI does this through its SREP (Supervisory Review and Evaluation Process). The supervisor can ask for more capital for risks that Pillar 1 misses.
  • Pillar 3 (market discipline): banks publicly disclose their capital and risk. Investors and depositors can then judge them and punish risky banks.

Example

An Indian bank meets the 9% CRAR minimum under Pillar 1. RBI's SREP review under Pillar 2 finds that too many of its loans are concentrated in one sector. The bank publishes its capital and risk data every quarter under Pillar 3.

Don't confuse with

  • Basel III buffers: the capital conservation buffer, the countercyclical buffer and the leverage ratio are extra requirements added in 2010. They are not separate pillars.

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