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Banking stocks have risen steadily since the Basel norms came into force 18 years ago: RBI

RBI
RBI

MUMBAI: Banking stocks have generally reacted positively to the strict capital norms imposed on domestic banks under the Basel regulations over an 18-year period beginning in October 1998, according to an RBI working paper.
Domestic banks were subjected to the Basel capital regulations in six stages from October 1998 to March 2016. These were put in place to bring domestic norms in line with international standards.

Domestic banking stocks only fell during two of the six phases of the Basel norms’ implementation, according to the working paper.
The opinions expressed in the working paper are solely those of the authors and do not reflect the views of the Reserve Bank of India.

The working paper, which was written by Gaurav Seth, an assistant general manager at the Reserve Bank of India (RBI), Supriya Katti, a project scientist, and BV Phani, a professor at IIT Kanpur, assesses market reaction to various stages of Basel norms implementation.

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Using event study methodology, it was discovered that banks were not willing to raise capital to 9% from 8% in the initial phase, causing the markets to overreact to the Basel I announcement.
According to the working paper titled ‘Stock price reaction on the announcement of Basel implementation: Evidence from domestic banks,’ subsequent announcements received a positive market response because banks had learned from their previous experiences and were thus prepared to deal with the expected changes.

Bank counters fell 2.96 percent a day before the actual implementation of Basel I norms on October 30, 1998, according to the report.

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When the RBI announced final guidelines for implementation of Basel II on April 27, 2007, valuation increased significantly.

Prior to the announcement of the third phase on December 30, 2011, the market reacted negatively, but banking stocks later saw a valuation gain of 2.03 percent.

On May 2, 2012, the fourth phase began. All 34 banking stocks, on the other hand, were down 5.82 percent at the time.

According to the working paper, the fifth phase began on March 27, 2014, and the market reacted favourably. When the sixth phase of implementation began in March 2016, the trend was similar.

Basel III norms were implemented in the third, fourth, fifth, and sixth phases.

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