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Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

Basel I and Basel II Accords: Capital Adequacy and Three Pillars

Updated 11 October 2026 · Fact-checked

Basel I (1988) required internationally active banks to hold capital of at least 8% of risk-weighted assets, covering mainly credit risk. Basel II made capital rules more risk-sensitive through three pillars: minimum capital requirements, supervisory review and market discipline. In India, RBI applied a 9% minimum capital ratio under Basel II.

Understand Basel I and Basel II Accords

The Basel Committee on Banking Supervision was set up by the central bank governors of the Group of Ten countries at the end of 1974, after serious disturbances in international currency and banking markets. It meets at the Bank for International Settlements in Basel, Switzerland. It has no legal power over any country. Its standards are recommendations. Each country's regulator, such as RBI, must adopt them through its own rules.

The problem it tackled was simple. Banks lend out public money. If they hold too little capital, a few bad loans can wipe them out. Different countries had different capital rules, so banks in lax countries had an unfair edge. The Committee wanted a common minimum standard.

Basel I (1988) was the first answer. It focused on credit risk. Each asset was given a risk weight, for example 0% for cash and government securities and 100% for ordinary corporate loans. Risk-weighted assets were added up. Banks had to hold capital of at least 8% of that figure. It was simple, but crude: all corporate loans got the same weight whether the borrower was strong or weak. It also did not cover market risk at first (an amendment in 1996 added it) and ignored operational risk.

Basel II (framework issued in 2004) was built to fix this. It keeps the 8% minimum but makes the calculation more risk-sensitive. It covers credit, market and operational risk. It rests on three pillars: Pillar 1 is minimum capital requirement, Pillar 2 is supervisory review process, and Pillar 3 is market discipline through disclosure.

In India, RBI moved to Basel II in stages. Foreign banks and Indian banks with foreign operations adopted it from 31 March 2008, and other scheduled commercial banks from 31 March 2009. RBI kept its own stricter minimum capital to risk-weighted assets ratio (CRAR) of 9%, above the Basel figure of 8%. Basel II is now largely superseded by Basel III, but its pillar structure still underlies Indian regulation.

Key rules to remember

Capital adequacy ratio (CRAR)
CRAR = (Eligible capital ÷ Risk-weighted assets) × 100
Capital is Tier 1 plus Tier 2 under the rules. Risk-weighted assets are exposures multiplied by risk weights.
Risk-weighted asset for one exposure
RWA = Exposure amount × Risk weight
Add up RWA across all assets, including off-balance-sheet items after conversion to credit equivalents.
Basel minimum under Basel I and II
Minimum total capital = 8% of RWA
Under Basel I this covered credit risk (market risk added in 1996). Basel II extended RWA to include market and operational risk.
RBI minimum under Basel II
Minimum CRAR = 9% of RWA
RBI prescribed 9%, higher than the Basel 8%.
Basel II total RWA
Total RWA = Credit RWA + Market-risk RWA + Operational-risk RWA
Capital charges for market and operational risk are converted to RWA by multiplying by 12.5 (the reciprocal of 8%).
Three pillars of Basel II
Pillar 1: Minimum capital | Pillar 2: Supervisory review | Pillar 3: Market discipline
Learn the order and the purpose of each.

How to solve Basel I and Basel II Accords questions

Exam questions are either descriptive (explain, compare, discuss) or numerical (compute CRAR). Use this method for both.

  1. 1Read what is asked: origin, Basel I, Basel II, a comparison, India's implementation, or a calculation.
  2. 2Open with a one-line definition or context: the Basel Committee, its purpose, and that its norms are not binding until RBI adopts them.
  3. 3For Basel I, state the 8% minimum, credit-risk focus and the idea of risk weights, then note the limits.
  4. 4For Basel II, name the three pillars and give at least two points under each, such as approaches to credit risk, supervisory review under ICAAP, and disclosures.
  5. 5For India, give the dates (March 2008 and March 2009 groups) and RBI's 9% CRAR.
  6. 6For a numerical, compute RWA first, add capital components, then divide and compare with the required minimum.
  7. 7Close with a conclusion: whether the bank meets the norm, or why Basel II improved on Basel I.

Quickest way: Compare in a table-style list: Basel I vs Basel II

When to use it: Use when the question asks for differences, or when you have little time and need a structured answer.

  1. Write the contrast on five points: coverage of risk, risk sensitivity, structure, supervisory role, disclosure.
  2. Basel I: credit risk mainly, fixed risk weights, one requirement (8%), no formal supervisory review, no disclosure standard.
  3. Basel II: credit, market and operational risk, ratings or internal models, three pillars, Pillar 2 review, Pillar 3 disclosure.
  4. Add the India line: RBI adopted Basel II in 2008-09 with 9% CRAR.
  5. For numericals, write: RWA total, capital, CRAR = capital ÷ RWA × 100, then one line of conclusion.

Common mistakes in Basel I and Basel II Accords

  • Saying Basel norms are binding law on Indian banks as issued by the Committee.

    Students treat the Committee like a regulator.

    Fix: State that the Committee only recommends. RBI makes the norms binding by issuing directions.

  • Mixing up the pillars, for example calling Pillar 2 market discipline.

    The names sound similar and students memorise out of order.

    Fix: Remember the order: 1 capital, 2 supervisors, 3 market. Pillar 3 is disclosure.

  • Writing that Basel I covered operational risk.

    Students blend Basel I with Basel II.

    Fix: Basel I focused on credit risk, with market risk added by a 1996 amendment. Operational risk came with Basel II.

  • Using 8% as RBI's minimum for Indian banks.

    Basel's figure is better known.

    Fix: Write that Basel's minimum is 8% and RBI required 9% CRAR.

  • Forgetting to apply risk weights in a numerical and dividing capital by total assets.

    Students confuse CRAR with a simple leverage ratio.

    Fix: Always multiply each exposure by its risk weight first, then divide capital by total RWA.

  • Writing the 12.5 conversion the wrong way round.

    It is memorised without reasoning.

    Fix: Capital charge is 8% of RWA, so RWA = capital charge × 12.5 (since 1 ÷ 0.08 = 12.5).

Worked examples

Example 1

A bank has the following assets: cash ₹10 crore (0% risk weight), government securities ₹40 crore (0%), corporate loans ₹100 crore (100%) and housing loans ₹50 crore (50%). Its eligible capital is ₹12 crore. Compute the CRAR and state whether it meets RBI's 9% minimum under Basel II (consider credit risk only).

Show the solution
  1. Cash: 10 × 0% = ₹0.
  2. Government securities: 40 × 0% = ₹0.
  3. Corporate loans: 100 × 100% = ₹100 crore.
  4. Housing loans: 50 × 50% = ₹25 crore.
  5. Total RWA = 0 + 0 + 100 + 25 = ₹125 crore.
  6. CRAR = 12 ÷ 125 × 100 = 9.6%.
  7. Compare: 9.6% is above 9%.

Answer: CRAR is 9.6%. The bank meets RBI's 9% minimum (and the Basel 8%).

Example 2

Explain the three pillars of Basel II and state how it differs from Basel I.

Show the solution
  1. Context: Basel II was issued by the Basel Committee in 2004 to make capital rules more risk-sensitive than Basel I (1988).
  2. Pillar 1, minimum capital requirement: banks hold capital of at least 8% of RWA (9% in India), with RWA covering credit, market and operational risk. Banks may use standardised approaches or, with approval, internal-ratings-based approaches for credit risk.
  3. Pillar 2, supervisory review: the bank assesses its own capital needs through an internal process, and the supervisor reviews it and can require extra capital where risks are higher.
  4. Pillar 3, market discipline: banks must disclose capital structure, risk exposures and capital adequacy so that investors and depositors can judge them.
  5. Difference: Basel I mainly covered credit risk with broad fixed risk weights and had no supervisory review or disclosure pillar. Basel II covers three risks, links weights to credit quality, and adds Pillars 2 and 3.
  6. India: RBI implemented Basel II from 31 March 2008 for foreign banks and Indian banks with foreign presence, and from 31 March 2009 for other scheduled commercial banks, with 9% CRAR.

Answer: Basel II rests on minimum capital, supervisory review and market discipline. Unlike Basel I, it covers more risks, is more risk-sensitive, and requires supervision and disclosure.

Exam tips

  • Learn the three pillars with two sub-points each. A bare list of names earns little.
  • Always give the India angle: RBI's 9% CRAR and the 2008 and 2009 implementation dates.
  • For comparison questions, use a clear point-by-point format and finish with a one-line conclusion.
  • In numericals, show the RWA working line by line. Method marks matter even if the final figure slips.
  • Mention that Basel III builds on these accords, so your answer links to the next topic.

Practice questions from Risk Management in Banks and Basel Accords

Basel I and Basel II Accords in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Basel I and Basel II Accords: frequently asked questions

What is the main difference between Basel I and Basel II?

Basel I set a single 8% capital minimum mainly against credit risk with fixed risk weights. Basel II kept 8% but made weights more risk-sensitive, added market and operational risk, and introduced supervisory review and disclosure.

What are the three pillars of Basel II?

Pillar 1 is the minimum capital requirement. Pillar 2 is the supervisory review process. Pillar 3 is market discipline through public disclosure by banks.

When did India implement Basel II?

RBI required foreign banks and Indian banks with foreign operations to comply from 31 March 2008. Other scheduled commercial banks followed from 31 March 2009. RBI set the minimum CRAR at 9%.

Are Basel norms law in India?

No. The Basel Committee only issues standards. They bind Indian banks only because RBI adopts them through its regulatory directions.