With the implementation of the Basel Accord II in Indian banks, a question has emerged as to how well the accord will be able to fulfill its role of supervision of banks and also the role of checking crisis situation in banks. The role of Basel II can be judged only when one looks into the success and failure of the Basel I Accord and try to find out whether the accord actually led to the crisis in some of the banks, as has been pointed out by some economists, and whether it failed to focus on areas which were causing crisis in banks. The study has taken the case of Global Trust Bank as the focus area, since it was the most prominent example of a crisis situation after Basel I was implemented. By using one of the most popular models of risk analysis, CAMEL model, it has been concluded that the crisis was not the effect of strict capital norms under Basel I, but nevertheless, it highlights the inability of the accord to take into account the operational risk which seems to be the main reason for the liquidation of the bank.

Following a series of bank failures in the 1980s, a committee was formed comprising central banks and supervisory authorities of 12 countries in 1987. It is famously known as the Basel Committee on Banking Supervision (BCBS). The committee was entrusted with the task of setting standards for banking operations and devising policies which banks across the world were expected to abide by in order to ensure a sound and healthy banking system in every member country. The BCBS developed a set of international capital adequacy guidelines for commercial banks, which came to be known as the Basel I Accord. The accord proposed that capital adequacy of banks is to be measured in respect of their Risk Weighted Asset (RWA) exposures in order to capture the riskiness of investments undertaken by the respective banks and that banks must maintain a minimum amount of capital reserve to face unforeseen events.

International monetary authorities like IMF and international financial institutions like World Bank stressed the need for a healthy financial sector to build up the confidence of private sector in the financial system. This prompted the Reserve Bank of India (RBI) to set up a committee on financial system under the leadership of Narsimham in 1991, which recommended the introduction of capital adequacy norms for the commercial banks in India in the line of BCBS proposals. Accordingly, India implemented the Basel framework with effect from 1992-93, which was spread over three yearsbanks with branches abroad were required to comply fully by the end of March 1994, while other banks were required to comply by the end of March 1996.

The Basel accord of capital adequacy was widely accepted and implemented all over the world and was considered to be a solution to all banking problems faced by the financial regulatory authorities. However, the Basel I accord was criticized by bankers, scholars and policy makers all over the world for being too narrow in its scope to ensure adequate financial stability in the international financial system. Also, Basel I's omission of market risk aspect is believed to limit the accord's ability to influence countries and banks to follow the guidelines. It is also argued that due to the wide breadth and absoluteness of Basel I's risk weighting, often banks have been found to be misusing the norms in improving their profitability even if it increased their riskiness like investing in more risky assets, thus putting more risk on their loan books than what was intended by the framework of the accord.

Bank Management Journal, Basel Accord, Global Trust Bank, IMF, Banking Operations, International Financial Institutions, World Bank, Risk Weighted Asset, CAMEL Model, Commercial Banks, Banking System, Risk Analysis, Capital Reserves, Credit Risk, Capital Ratios.