While the technical aspects of credit risk management in the Basel II environment will be covered during the course of this two-day seminar, I would like to present a brief bird’s eye view of the evolution of the capital adequacy norm for the banks over the decades so as to put the new framework in perspective, the imperatives that led to its refinement in the form of Basel II, the expectations of the RBI from the banking system during the implementation phase and beyond, and the issues and challenges facing us that will need to be addressed in implementing the new framework in a non-disruptive manner.
The evolution of capital standards 3. It is interesting to note that till the 1980s, the risk-weighted approach to capital adequacy was not in vogue but the bank’s capital was measured through the traditional gearing ratios. During the 1980s, the increasing competition amongst the international banks and rapid growth in their assets had led to concerns about their deteriorating capital levels.