Similarities Between Edgar Allan Poe And Cask Of Amontillado

Edgar Allan Poe, a writer known for his mysterious and dark works, has had a lot of time perfecting his style of writing in short stories. His short stories, all usually dealing with the concept of death, relates back to his childhood, linking to his past experiences. As a small child, Poes father had abandoned his family, leaving his mother to take care of him and his sister. When Poe turned three, his mother had passed away due to tuberculosis. Exposed to death at such a young age, it connects to his writing style and how he incorporates death in his stories. Throughout the course of his childhood, Poe had encountered many other traumatic experiences dealing with the deaths of loved ones. The repeating occurrence of death in his life†¦show more content†¦Based on The Cask of Amontillado, Montresor says, for the half of a century no mortal has disturbed them. In pace requiescat (Edgar Allan Poe 7). The phrase in pace requiescat translates to rest in peace. By using the phra se rest in peace, it gives the story mystery, putting an eerie tone to the story. Additionally, in the short story, The Black Cat, the narrator reminisces about the experiences he has had with his black cat. He and his wife, both animal lovers, had gotten many pets, his black cat, warming up to him immediately. Pluto, the cat, had been the narrators favorite pet, creating a special bond between them. The narrator soon developed a short temper, and had started to lash out on everyone around him, having sudden outbursts for nothing of significance. Pluto, who had once been his playmate, had turned into a creature that the narrator had felt such loathing and hatred towards. The black cat had followed the narrator, everywhere, acting like a shadow and pestering him. After days of complete and utter irritation and displeasure, the narrator scraped out the cats eye. Shortly after, the narrator hangs the cat, killing it immediately. A new black cat shows up and the narrator explains his fe elings towards the cat with specific words. Poe also uses word choice in The Black Cat to express a cruel and eerie tone throughout his story. He uses specific words to describe emotions that hisShow MoreRelatedThe Masque of the Red Death vs. the Cask of Amontillado1564 Words   |  7 PagesLester Small LITR 220 24 February 2013 The Masque of the Red Death vs. The Cask of Amontillado â€Å"The Masque of the Red Death† and â€Å"The Cask of Amontillado† written by Edgar Allan Poe are somewhat different. The major themes of these stories differ significantly, as does the emphasis placed on each character which dealt more to The Cask of Amontillado† than to â€Å"The Masque of the Red Death† Regardless of this, the stories are similar in many ways. For instance, both belong to the literacy of theRead MoreThe Cask Of Amontillado : William Shakespeare1450 Words   |  6 PagesFinal Paper 17 December 2014 The Cask of Amontillado: Shakespeare in American Literature There are a few names in literature which represent the ability to captivate an audience with suspense and gloom. Though masters of different genres, Edgar Allen Poe and William Shakespeare both embody this unique ability. One of Poe’s work in particular resembles the beauty and darkness that is found in Shakespeare’s tragedies. In the intriguing short story â€Å"The Cask of Amontillado,† two wealthy gentlemen from anRead MoreCommen Elemements of Fiction 1570 Words   |  7 Pagesliteracy genius Edgar Allen Poe. Most of Poe’s works do not have the slightest bit of joy or happiness in them. His literature mainly consists of a dark and gothic mood; mostly due to the fact that his actual life was worse than his stories. For those who have read a few of his stories or poems you might notice a similarity in plot. In his worksâ€Å" The Cask of Amontillado,† â€Å" The Black Cat,† and â€Å" The Tell-Tale Heart,† there is clear similarity of plot between the three stories. In â€Å" The Cask of AmontilladoRead MoreComparing Fall of the House of Usher and The Cask of Amontillado1299 Words   |  5 PagesCompare Contrast Edgar Allan Poe Short Stories Introduction The Fall of the House of Usher and The Cask of Amontillado are two of Edgar Allan Poes most well-known and noteworthy stories. This paper compares and contrasts the two stories and provides and outline as well. The Fall of the House of Usher is based on terror just as The Cask of Amontillado (hereafter called Cask) is based on terror but there are many different components that Poe uses that contrast with the Cask, and they willRead MoreAnalysis of Edgar Allan Poes Writing Style Essay776 Words   |  4 Pageshorror, Edgar Allan Poe is known for his Gothic writing style. His style is created through his use of punctuation, sentence structure, word choice, tone, and figurative language. Punctuation-wise; dashes, exclamation marks, semicolons, and commas are a favorite of Poe. His sentences vary greatly; their structures are influenced by punctuation. Much of his word choice set the tone of his works. Figurative language colors his writings with description. Such is observed in the similarities between twoRead MoreEdgar Allan Poe s The Red Death And Cask Of Amontillado1595 Words   |  7 Pages American author and poet, Edgar Allan Poe, was born January 19th, 1809, and died at the age of 40 on October 7th, 1849. Poe had a horrendous childhood. As a child, he was abandoned by his father, David Poe Jr., and later, his foster father, John Allan. His mother, Eliza Poe, died of tuberculosis, along with his foster mother, Frances Allan and Virginia Clemm, Poe’s wife. After the death of his wife, Poe attempted suicide out of grief. The traumatic events of his life affected Poe’s writing styleRead MoreFive Short Stories of Edgar Allan Poe Essay1311 Words   |  6 PagesBarnabà ¡s Kanik Five short stories of Edgar Allan Poe Edgar Allan Poe (1809-1849) pioneered many of the most enduring forms of American popular culture, including detective story and the Gothic or sensational tale. I will compare and contrast five short stories of Poe: The Gold-Bug, The Purloined Letter, â€Å"Thou Art the Man†, The Cask of Amontillado and The Pit and the Pendulum. The genre, the purpose and role of the narrator and the parallelism between all of the stories will be examined. Read More Big Heads and Short Tempers: Edgar Allan Poe in Context Essay2064 Words   |  9 PagesEdgar Allan Poe was the epitome of a tormented genius. He possessed uncontrollable and self-inflicted internal problems. In addition, Poe was plagued by external difficulties—some preventable, some not. Most doctors today would pronounce Poe to be bipolar, chronically depressed, and perhaps even OCD. Most people today, and any day, would declare Poe to be self-obsessed and arrogant, or—at the least—snobbish. His personal life would also be considered less than ideal, though how much he was personallyRead MoreGothic Literature : The Dark Side Of Romanticism1518 Words   |  7 PagesGothic literature is the dark side of Romanticism. The theme of Gothic stories is either mysterious, horror, or even death. Nathaniel Hawthorne and Edgar Allan Poe are authors that demonstrate Gothic literature. Some of their work include, â€Å"The Cask of Amontillado† written by Edgar Allan Poe and â€Å"The Birthmark† by Nathaniel Hawthorne. The Cask of Amontillado tells how the narrator Montresor seeks revenge on his acquaintance, Fortunato. Montresor to desperate measures and did not catch. However, in â€Å"TheRead More Juxtaposing the Most Similar Contradiction in Edgar Allan Poes Work2077 Words   |  9 PagesThroughout all of Edgar Allan Poes works are common ideas that oppose each such as madness versus sanity, reality versus the imagined reality and life versus death. Usually these sentiments are taken as contrasting ideas with little similarities to each other, like black and white. However, many of these motifs are situated in the grey category. Poe uses the communal thought pathway to highlight its antithesis; the pathway of grey. With the new pathway, he emphasizes the similarities of the opposing

Background The Evolution of the Internet Free Essays

The Internet has undergone explosive growth since the first connections were established in 1969. This growth has necessitated an extremely large system scale-up that has required new developments in the technology of information transfer. These new developments allow simplified solutions to the problem of how to reliably get information from point A to point B. We will write a custom essay sample on Background The Evolution of the Internet or any similar topic only for you Order Now Unfortunately, the rapid pace of the required technological advancement has not allowed for optimal solutions to the scale-up problem. Rather, these solutions appear to have been the most convenient and practical at the time. Thus, the information transfer technology of today’s internet does not guarantee the ‘best path’ for data transmission. The definition of the best path may mean the most cost effective or the fastest path or some path based on optimization of multiple protocols, but the current technology used in the internet cannot guarantee that the best path for data transmission will be chosen. The result is a reduction in economic and system resource efficiency. The Evolution of the Internet The Internet has become integrated into the economic, technological and security infrastructure of virtually every country in the world. However, the internet had quite a humble beginning. It was originally designed as a back-up military communications network (MILNET) and as a university research communications network (National Science Foundation Network, NFSNET / Advanced Research Projects Agency Network, ARPANET). The original technology developed for these limited systems was not designed for the massive scale-up that has occurred since inception. Moreover, the original design of the internet system was based on the sharing of resources. The recent applications of the internet for commerce and proprietary information transfer processes make resource sharing an undesirable aspect. A more recent development is resource usage based on policies limiting what part of the internet can use a specific service or data transmission line. An Introduction to Networks and Routing What is a network? A network is a group of computers linked together by transmission lines that allow communication between the computers. Some of these computers are the equipment used by people on their desktop. Other computers in the network are computers that are designed only to direct traffic on the network or between different networks. Computer scientists often think of networks as large graphs with lines used to connect dots. The dots are called nodes and correspond to computers and the lines correspond to the transmission lines that connect the computers. The Internet is a giant network of smaller networks, called autonomous systems, that allows computers to be connected around the globe. What is routing? The process of transmitting information from a source computer to a destination computer is called routing. The way this is done can greatly effect how quickly the information is transmitted between the two computers. What is a router? A router is a computer with more than one connection to the rest of the network that is programmed to choose which transmission lines to send information. Some routers or designed to route information between networks, as on the Internet, while other routers work to route information between computers on the same network. How do routers route? In order for routers to choose the best route (or path) from the source computer to the destination computer, it is necessary that the routers communicate with each other about what computers and networks they are connected to and the routes that can be used to reach these computers and networks. Often these routes must go through other routers. What are advertisements? Advertisements are the messages sent between routers to communicate information about routes to reach each destination. What is convergence? Convergence occurs on the network or internet when all the routers know all the routes to all the destinations. The time required for all the routers to agree on the state of the network, the network topology, is known as the convergence time. When convergence does not occur, then data can be transmitted to a router which does not know how to get to a destination and this data is then lost. This is called a black hole. It is also possible that the data can be passed around a set of routers continuously without getting to the destination. This is called a routing loop. What is a data packet? When a large message is being transmitted, the message will probably be broken up into smaller messages called data packets, and these data packets may not all be sent by the same path across the Internet, although they will hopefully all reach the same destination What is a metric? A routing metric is a measure associated with a particular path between a source and a destination used by the router to decide what path is the best path. Typical metrics used by routing algorithms include path length, bandwidth, load, reliability, delay (or latency) and communication cost. Path length is a geometric measure of how long the transmission lines are. Bandwidth is used to describe the available transmission rate (bps) of a given section the possible transmission path. The load is the data packet transmission per unit time. The reliability of a data transmission path is essentially the number of errors per unit time. The delay in data transmission along a certain path is due to a combination of the metrics that have already been discussed, including geometric length of the transmission lines, bandwidth, and data traffic congestion. The communication cost is essentially the commercial cost of data transmission along a certain transmission line. What is a router protocol? A router protocol is the way the router is programmed to choose the best path for data transmission and communicate with other routers. This algorithm will consider path metrics associated with each path in a way defined by the by the manager of each AS. What is an internet address? In order for routers to identify the destination of a data transmission, every destination must have an address. The internet protocol (IP) method of addressing destinations uses a series of digits separated by dots. An example of an Internet address is 227. 130. 107. 5. Each of the 4 numbers separated by a dot has a value between 0 and 255. This range of values is set from the amount of computer memory designated for addressing at the beginning of the internet. The internet addressing scheme is similar to a scheme for international telephone calls. There is a ‘country code’ which is a fixed number for each country, and then there are other numbers which change on the phone number to refer to specific locations within the country. The numbers on the IP address for a network on the internet correspond to what would be the country code on an international phone number are referred to as ‘prefix’. The other numbers on the IP address change to refer to individual computers on that particular network. A ‘netmask’ can also be used to specify which numbers on the IP address for a given network are fixed and which ones can be changed. A netmask is a series on ones and zeroes that can be put over the IP address. The part of the IP address under the ones is fixed as a network address. The part of the IP address under the zeros can be changed to indicate specific computers on the network. What is a Domain Name System (DNS), the domain name and the Uniform Resource Locator (URL)? The DNS is a combination of computer hardware and software that can rapidly match the text specification of an IP address, like www. helpmegetoutofthis. com, to an IP address. The part, helpmegetoutofthis. com, is called the domain name. The whole text, www. helpmegetoutofthis. com, is called the Uniform Resource Locator (URL). When you send an e-mail or use the Internet, you use the domain name and the URL to locate specific sites. This allows people to type in the text name, or domain name, of an internet site into the Netscape browser instead of trying to remember the numerical IP address. The DNS automatically matches the text name to the IP address for the user when the transmission request is submitted. What are servers and clients? All of the computers on the Internet are classified as either servers or clients. The computers that provide services to other computers are called servers. The computers that connect to servers to use the services are called clients. Examples of servers are Web servers, e-mail servers, DNS servers and FTP servers. The computers used at the desktop are generally clients. How the internet works. Although the details of routing and software are complex, the operation of the internet from the users’ perspective is fairly straight forward. As an example of what happens when the Internet is used, consider that you type the URL www. helpmegetoutofthis. com into the Netscape browser. The browser contacts a DNS server to get the IP address. A DNS server would start its search for an IP address. If it finds the IP address for the site, then it returns the IP address to the browser, which then contacts the server for www. helpmegetoutofthis. com, which then transmits the web page to your computer and browser so you can view it. The user is not aware that of the operation of an infrastructure of routers and transmission lines behind this action of retrieving a web page and transmitting the data from one computer to another. The infrastructure of the internet can be seen as a massive array of data relay nodes (routers) interconnected by data transmission lines, where each node can service multiple transmission lines. In the general case where information must be sent across several nodes before being received, there will be many possible pathways over which this transmission might occur. The routers serve to find a path for the data transmission to occur. The routing of a file or data packets of a file is either be done by the technique of source routing or the technique of destination routing. In source routing, the path the data transmission will follow id specified at the source of the transmission, while destination routing is controlled by the routers along the path. In the modern internet, almost all routing is done by destination routing because of security issues associated with source routing. Thus, the routers must be programmed with protocols that allow a reasonable, perhaps optimum, path choice for each data packet. For the routers to choose an optimum path also requires that the interconnected routers communicate information concerning local transmission line metrics. Router communication is thus itself a massive information transfer process, given that there is more than 100,000 networks and millions of hosts on the Internet. When viewing the enormity of the problem, it is perhaps easier to understand why engineers have accepted a sub-optimal solution to the problem of efficiency in data transfer on the Internet. When initially confronting a problem, the practical engineering approach is to simplify the problem to the point where a working solution can be obtained and then refine that solution once the system is functional. Some of the simplifying assumptions used by engineers for the current internet data transmission system include 1) A transmission line is never over capacity and is always available as a path choice. 2) The performance of the router and transmission line does not depend on the amount of traffic. These two assumptions do simplify the problem of path choice considerably because now all the transmission lines and nodes may be considered equal in capacity and performance completely independent of traffic. As such, it is a much simpler optimization problem consisting of finding the route with the shortest path length. To simplify the problem even further, another assumption is made: 3) Consider that an â€Å"Autonomous System† (AS), is a small internet inside the Internet. An AS is generally considered to be a sub-network of an Internet with a common administrative authority and is regulated by a specific set of administrative guidelines. It is assumed that every AS is the same and provides the same performance. The problem of Internet routing can now be broken down into the simpler problem of selecting optimum paths inside the AS and then considering the optimum paths between the AS. Since there are ‘only’ around 15,000 active AS’s on the Internet, the overall problem is reduced to finding the best route over 15,000 AS nodes, and then the much simpler problem of finding the best route through each AS. There is an important (to this thesis) set of protocols which control the exchange of routing information between the AS’s. The sort of routers in an AS which communicates with the rest of the internet and other AS’s are called border routers. Border routers are controlled by a set of programming instructions known as Border Gateway Protocol, BGP. A more detailed discussion of computer networking principals and the Internet facts can be found in e. g. [7]. An Introduction to Router Protocols. Routers are computers connected to multiple networks and programmed to control the data transmission between the networks. Usually, there are multiple paths that are possible for transmission of data between two points on the Internet. The routers involved in the transmission between two points can be programmed to choose the ‘best path’ based on some metric. The ‘protocols’ used to determine the path for data transmission are routing algorithms. Typical metrics used by routing algorithms include path length, bandwidth, load, reliability, delay (or latency) and communication cost. Path length. Path length is a geometric measure of how long the transmission lines are. The routers can be programmed to assign weights to each transmission line proportional to the length of the line or each network node. The path length is then the sum of the weights of the nodes, lines or lines plus nodes along the possible transmission path. Bandwidth. Bandwidth is used to describe the available transmission rate (bps) of a given section the possible transmission path. An open 64 kbps line would not generally be chosen as the pathway for data transmission if an open 10 Mbps Ethernet link is also open, assuming everything else is equal. However, sometimes the higher bandwidth path is very busy and the time required for transmission on a busy, high bandwidth line is actually longer than on a path with a lower bandwidth. Load. This data packet transmission per unit time or the percent of CPU utilization of a router on a given path is referred to as the load on this path. Reliability. The reliability of a data transmission path can be quantitatively described as the bit error rate and results in the assignment of numeric reliability metrics for the possible data transmission pathways. Delay. The delay in data transmission along a certain path is due to a combination of the metrics that have already been discussed, including geometric length of the transmission lines, bandwidth, and data traffic congestion. Because of the hybrid nature of the communications delay metric, it is commonly used in routing algorithms. Communication Cost. In some cases, the commercial cost of data transmission may be more important the time cost. Commercial organisations often prefer to transmit data over low capacity lines which they own as opposed to using public, high capacity lines that have usage charges. The routing algorithms do not have to use just one metric to determine the optimum route; rather it is possible to choose the optimum route based on multiple metrics. In order for the optimum path to be chosen by the routers between the data source and the data destination, the routers must communicate information about the relevant metrics with other routers. This nature of this communication process is also defined by the routing algorithm and the transmission time is linked to the time required for the routers to have the necessary information about the states of the surrounding routers. The time required for all the routers to agree on the state of the network, the network topology, is known as the convergence time and when all routers are aware of the network topology, the network is said to have converged. Some of the common routing algorithm types can indeed affect the convergence of the network. Some of the different algorithms characteristics that must be chosen when designing are static or dynamic routing, single path or multi-path routing and link state or distance vector routing. Static Routing. Static routing is done by use of a static list of attributes describing the network topology at the initiation of the network. This list, called a routing table, is used by the routers to decide the optimum routes for each type of data transmission and can only be changed manually. Therefore, if anything changes in the network, such as a cable breaking or a router crashing, the viability of the network is likely to be compromised. The advantage is that there is no communication required between routers, thus the network is always converged. Dynamic Routing. In contrast to static routing, dynamic routing continually updates the routing tables according to changes that might occur in the network topology. This type of real time information processing allows the network to adjust to variations in data traffic and component reliability, but does require communication between the routers and thus there is a convergence time cost associated with this solution. Single Path vs Multi-path Routing. Single path and muli-path routing are accurate descriptive terms regarding the use of either a single line to send multiple packets of data from a given source to a given destination as opposed to using multiple paths to send all the data packets from the source to the destination. Multiple path algorithms achieve a much higher transmission rate because of a more efficient utilization of available resources. Link State vs Dynamic Routing Protocols. Link-state algorithms are dynamic routing algorithms which require routers to send routing table information to all the routers in the network, but only that information which describes its own operational state. Distance-vector algorithms, however, require each router to send the whole of its router table, but only to the neighbouring routers. Because the link-state algorithms require small amounts of information to be sent to a large number of routers and the distance vector algorithm requires large amounts of information sent to a small number of routers, the link state algorithm will converge faster. However, link state algorithms require more system resources (CPU time and memory). There is a new type of algorithm developed by CISCO which is a hybrid of the link-state algorithm and the distance vector algorithm [8].. This proprietary algorithm converges faster than the typical distance-vector algorithm but provides more information to the routers than the typical link-state algorithm. This is because the routers are allowed to actively query one another to obtain the necessary information missing from the partial tables communicated by the link-state algorithms. At the same time, this hybrid algorithm avoids communication of any superfluous information exhibited in the router communications of the full tables associated with distance-vector algorithm. Switching. The distance vector, link state or hybrid algorithms all have the same purpose, to insure that all of the routers have an updated table that gives information on all the data transmission paths to a specific destination. Each of these protocols requires that when data is transmitted from a source to a destination, the routers have the ability to ‘switch’ the address on the data transmission. When a router receives a data packet from a source with the destination address, it examines the address of the destination. If the router has a path to that destination in the routing table, then the router determines the address of the next router the data packet will ‘hop’ to and changes the physical address of packet to that of the next hop, and then transmits the packet. This process of physical address change is called ‘switching’. It will be repeated at each hop until the packet reaches the final destination. Although the physical address for the forwarding transmission of the data packet changes as the packet moves across the Internet, the final destination address remains associated with the packet and is a constant. The internet is divided up into hierarchical groups that are useful in the description of the switching process. At the bottom of this hierarchy are network devices without the capability to switch and forward packets between sub-networks, where an AS is a sub-network. These network devices are called end systems (ESs), because if a packet is transmitted there, it cannot be forwarded and has come to the end. At the top of the hierarchy are the network devices that can switch physical addresses are called intermediate systems (ISs). An IS which can only forward packets within a sub-network are referred to as intra-domain ISs while those which communicate either within or between sub-networks are called intra-domain ISs. Details of Routing Algorithms Link State Algorithms In a link state algorithm, every router in the network is notified of a topology change at the same time. This avoids some of the problems associated with the nearest neighbour update propagation that occurs in the distance vector algorithms. The ‘Open Shortest Path First’ (OSPF) protocol uses a graph topology algorithm like Dijkstra’s Algorithm to determine the best path for data transmission between a given data source and a data destination. The metric used for route optimisation is specific to the manual configuration of the router. However, the default metric is the speed of the interface. The OSPF uses a two level, hierarchical network classification. The lower level of hierarchy is groups of routers called areas. All the routers in an area have full knowledge of all the other routers in the area, but reduced knowledge of routers in a different area. The different areas organized within the OSPF algorithm are connected by border routers, which have full knowledge of multiple areas. The upper level of the hierarchy is the backbone network, to which all areas must be connected. That is, all data traffic going from one area to another must pass through the backbone routers. Distance Vector Algorithms In order for data to be transmitted from a source to a destination on the Internet, the destination must be identified using some mechanism. That is, each possible destination for data transmission must be described with an address. The scheme currently used to address the internet space is the Internet Protocol (IP) version 4. The IP version 4 uses an address length limited by 32 bits. An example of an Internet address is 227. 130. 107. 5 with the corresponding bit vector 11100011 10000010 01101011 00000101. An initial difficulty in managing the available address space was the implementation of a class structure, where large blocks of internet address space was reserved for organisations such as universities, leaving commercial applications with limited address space. Routing of data transmission in this address environment was referred to as class-full routing. To alleviate this problem of limited address space, the internet community has slowly evolved to a classless structure, with classless routing. In distance vector protocols, each router sends adjacent routers information about known paths to specific addresses. The neighbouring routers are sent information giving a distance metric of each one from a destination address. The distance metric could be the number of routers which must be used to reach the destination address, known as the ‘hop count’, or it could be the actual transmission distance in the network. Although this information is advertised only to the adjacent routers, these routers will then communicate the information with their neighbouring routers, and so on, until the entire network has the same information. This information is then used to build the routing table which associates the distance metric with a destination address. The distance vector protocol is implemented when a router receives a packet, notes the destination, determines the path with the shortest distance to the destination and then forwards the packet to the next router along the shortest distance path. One of the first distance vector protocols implemented on the Internet was the Routing Information Protocol (RIP). RIP uses the distance metric of hop count to determine the shortest distance to the destination address. It also implements several protocols to avoid having data packets pass through the same router more than once (router loops). The path vector protocol is a distance vector protocol that includes information on the routes over which the routing updates have been transmitted. It is this information on path structure which is used to avoid routing loops. Path Vector Protocols are also somewhat more sophisticated than RIP because an attempt is made to ‘weight’ each path based on a locally defined criteria that may not simply reflect the highest quality of service, but rather the highest profit for an ISP. The implementation of these types of router algorithms may be different in different parts of the Internet. When the algorithms are implemented inside an autonomous system, they are called Interior Gateway Protocols (IGP). Because the different autonomous systems that make up the Internet are independent from one another, the type of routing algorithm used within the autonomous systems can also be independent of one another. That is, the managers of each autonomous system are free to choose the type of algorithm which best suits their particular network, whether it is static or dynamic link-state or dynamic distance-vector. When the algorithms are implemented to control data transmission between autonomous systems, they are referred to as Exterior Gateway Protocols (EGP). The EGP connect all autonomous systems together to form the Internet and thus all EGP should use the same algorithm. The specific algorithm currently used as the EGP on the Internet is the Border Gateway Protocol (BGP), which is a type of distance vector algorithm called a path vector algorithm [9]. A path vector algorithm uses information about the final destination of the data transmission in addition to the attributes of the neighbouring links. It should be noted that the BGP algorithm can also be used as a router protocol within an autonomous system and is called an interior BGP (IBGP) in that instance. This necessitates calling the BGP an EBGP when it is implemented as an EGP. How to cite Background The Evolution of the Internet, Papers

Depreciation for Acquisition Value of the Asset- myassignmenthelp

Question: Discuss about theDepreciation for Acquisition Value of the Asset. Answer: Depreciation refers to the reduction in the cost value of the fixed assets according to the depreciation method used. The aim is to allow the provision to be made equal to the amount of cost of fixed assets so that companies does not requires to expend much to purchase the new machine. (Hussey and Ong, 2017). Things to be considered for depreciation are: Acquisition value of the asset: This value refers to the cost of the assets and paid at the time of buying the assets. There various things to be consider while determining the actual cost of acquisition of the assets such any expenditure occurred to bring the fixed to the place of operation will added to the cost of assets but any small repair and maintenance will not be added to the cost of the asset (Bebbington, Gray and Laughlin, 2001). Date when the asset is placed in the service: The date when the asset is first put to use is the starting date of depreciation. Stock resister must be maintained in order to record this data. Salvage Value: Fixed assets are recorded at the historical cost basis i.e. at their purchased value and some assets left with some value after complete depreciation has been provided this is termed as salvage value. Depreciation Method and rate: There are mainly three methods of depreciation they are: Straight line method Unit of production method Double-declining balance method It must be decided by the management that which method has to be used and how much rate of depreciation is to be applied on each asset (Bebbington, Gray and Laughlin, 2001). References Bebbington, J, Gray, R. and Laughlin, R. 2001. Financial Accounting: Practice and Principles. Cengage Learning EMEA. Hussey, R. and Ong, A. 2017. Corporate Financial Reporting. Springer.

The Authors That Face Various Hurdles and Overcome Them

Introduction Malcolm X, Helen Keller and David Raymond are all writers that struggled with self expression, identity and social conformity. These challenges emanated from the lack of language proficiency. However, all three authors succeeded in overcoming insurmountable challenges, and eventually cause audiences to relate to the plight of other people in similar circumstances.Advertising We will write a custom essay sample on X. Malcolm, H. Keller and D. Raymond – The Authors That Face Various Hurdles and Overcome Them specifically for you for only $16.05 $11/page Learn More How the authors are alike and different In all three short stories, the writers are struggling with some type of language-related inadequacy. Helen Keller was blind and deaf, so she could not express herself in written or spoken words. She explains that she was â€Å"at sea in a dense fog† meaning that she was trapped in a world of darkness and numbness (Keller 5). This caused her to become resentful and angry because she could not interact with the world around her. Keller was subsequently shut out from society because of these physical disabilities. Similarly, David Raymond struggled with another type of disability; which was a mental one known as Dyslexia. The condition caused him to be shunned by his playmates. His routine was never the usual one in class; for instance, he had to meet lots of psychiatrists for evaluation (Raymond 14). At some point, Raymond was even taken to a special school. He resented the bus that came to pick him up because it carried mentally retarded or severely deformed children. David did not want his neighbours to see him getting into the bus because they would judge him; all he wanted was to be like everyone else. The condition prevented him from expressing himself or performing normal classroom activities. Malcolm X, had his own type of struggle too; illiteracy. He was dealing with another type of mental darkness as well. This condition prevented him from expressing his ideas as clearly as he needed to. Having been a street hustler, he lacked the opportunities needed to acquire literacy skills. The writer was unable to communicate or interact with people properly, and this put him in a self-created prison. Despite these common struggles among the three authors, one also realises that their social and cultural circumstances had a profound effect on their perception of lack and limitation. As an African American male living in a discriminative society, Malcolm X, felt that his illiteracy contributed to the oppression of his people. His expression of these struggles was influenced by his worldview as a member of the black race. Conversely, Keller felt that her unfamiliarity with language caused her to be isolated. Her identity was defined by her physical disabilities. It is from this background, that she expresses her agonies. Raymond’s worldview was determined by his status as a dyslexic individual. Therefore, his inadequacies, identity crisis, and low self esteem all stemmed from this background. David’s style is symptomatic of this position in society.Advertising Looking for essay on american literature? Let's see if we can help you! Get your first paper with 15% OFF Learn More Keller, Raymond and Malcolm X gain a degree of self awareness when they discover the power of language. Malcolm X could never realise his goals of liberation for the black people unless he could express himself well in the English language; when he recognized this, then he became a new person. Malcolm admired his peer’s command of the language, and made the decision to change his circumstances (Malcolm 277). The life-changing moment occurred when he appreciated that there were so many words to learn from the dictionary. He even copied entire pages – word for word – in order to concretise what he was learning. Malcolm decided that the mastery of lang uage would deliver him from oppression; it would be his tool to personal empowerment and fulfilment. In this regard, the author became self aware. He realised his real potential, and gets a renewed purpose in life. The same thing happened to Keller after she discovered the power of language. When her teacher passed this strange liquid over her palm, and spelt its name on her other hand, she experienced a great awakening. She realised that she had been set free, and that all the barriers that held her hostage would soon be â€Å"swept away†. To Keller, the discovery of language signified the discovery of her ability to live a meaningful and joyous life. David Raymond also became self aware after realising that is was possible to still be intelligent or achieve great things when one was Dyslexic. He cites examples such as Einstein and Leonardo da Vinci. All three authors succeed in explaining life in the context of their experiences. Language mastery is something that many peop le take for granted because it comes naturally to them. However, Keller, Raymond and Malcolm X all have peculiar circumstances that make it quite difficult to learn how to read and write. After reading these short stories, one gets to understand the significance of words and their meanings. The narratives are important in raising awareness about racial oppression, physical and mental disabilities, and how they relate to self expression and language. Conclusion The short stories under analysis are quite similar to one another because the authors face various hurdles and overcome them; they become self aware, and teach audiences about challenges in literacy based on their circumstances. Consequently, the three narratives are important in instilling empathy among audiences concerning the experiences of others who are different.Advertising We will write a custom essay sample on X. Malcolm, H. Keller and D. Raymond – The Authors That Face Various Hurdles and Overcome Them spe cifically for you for only $16.05 $11/page Learn More Works Cited Keller, Helen. The day language came into my life. USI, 2011. Web.. Malcolm, X. â€Å"Discovering the power of language.† Language awareness: readings for college writers. Eds. Paul Eschholz, Alfred Rosa and Virginia Clark. NY: St. Martin’s Press, 2004. 271-284. Print. Raymond, David. On being seventeen, bright, and unable to read. Mrshatzi, 2011. Web. This essay on X. Malcolm, H. Keller and D. Raymond – The Authors That Face Various Hurdles and Overcome Them was written and submitted by user Giana Z. to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.

Jean Piaget theory on child development Essays

Jean Piaget theory on child development Essays Jean Piaget theory on child development Essay Jean Piaget theory on child development Essay Jean Piaget theory on child development Piaget was a psychologist who developed interest in children’s intellect. He worked with Alfred Binet and later came up with a theory on cognitive development of children. This theory explains cognitive child development. This type of development entails changes in cognition processes and capabilities. According to this theorist’s view, early development in cognition includes processes founded on actions. Later on, it advances to changes in mental activities. Piaget states that adults are not intelligent than children. The difference is children have a different way of thinking. This observation amazed Albert Einstein because people would not see its simplicity. Piaget came up with some concepts of this theory. Some of them are schemas, which is the description of mental and physical activities included in knowledge and understanding. The schema contains knowledge and its method of acquisition. When children encounter experiences, the new knowledge is added, or schemas change. For instance, if a child only sees a kitten he or she will tend to think all cats resemble that kitten. After he or she sees a cat, her perception will change.

Basel Norms in India

B. C. D. E. F. G. Background Functions of Basel Committee The Evolution to Basel II – First Basel Accord Capital Requirements and Capital Calculation under Basel I Criticisms of Basel I New Approach to Risk Based Capital Structure of Basel II First Pillar : Minimum Capital Requirement Types of Risks under Pillar I The Second Pillar : Supervisory Review Process The Third Pillar : Market Discipline 3 3 3 3 3 4 4 II. The Three Pillar Approach A. B. C. D. 5 5 6 6 7 7 7 III. Capital Arbitrage and Core Effect of Basel II A. Capital Arbitrage B. Bank Loan Rating under Basel II Capital Adequacy Framework C. Effect of Basel II on Bank Loan Rating IV. Basel II in India A. Implementation C. Impact on Indian Banks D. Impact on Various Elements of Investment Portfolio of Banks E. Impact on Bad Debts and NPA’s of Indian Banks D. Government Policy on Foreign Investment E. Threat of Foreign Takeover 8 8 9 10 10 10 V. Conclusion A. SWOT Analysis of Basel II in Indian Banking Context B. Challenges going ahead under Basel II 11 11 13 13 VI. VII. References The Technical Paper Presentation Team 2 I. Introduction: A. Background Basel II is a new capital adequacy framework applicable to Scheduled Commercial Banks in India as mandated by the Reserve Bank of India (RBI). The Basel II guidelines were issued by the Basel Committee on Banking Supervision that was initially published in June 2004. The Accord has been accepted by over 100 countries including India. In April 2007, RBI published the final guidelines for Banks operating in India. Basel II aims to create international standards that deals with Capital Measurement and Capital Standards for Banks which banking regulators can use when creating regulations about how much banks need to put aside to guard against the types of financial and operational risks banks face. The Basel Committee on Banking Supervision was constituted by the Central Bank Governors of the G-10 countries in 1974 consisting of members from Australia, Brazil, Canada, United States, United Kingdom, Spain, India, Japan, etc to name a few. The ommittee regularly meets four times a year at the Bank for International Settlements (BIS) in Basel, Switzerland where its 10 member Secretariat is located. B. Functions of the Basel Committee The purpose of the committee is to encourage the convergence toward common approaches and standards. However, the Basel Committee is not a classical multilateral organisation like World Trade Organisation. It has no founding treaty and it does not issue binding regulat ions. It is rather an informal forum to find policy solutions and promulgate standards. C. The Evolution to Basel II – First Basel Accord The First Basel Accord (Basel I) was completed in 1988. The main features of Basel I were: †¢ †¢ †¢ Set minimum capital standards for banks Standards focused on credit risk, the main risk incurred by banks Became effective end-year 1992 The First Basel Accord aimed at creating a level playing field for internationally active banks. Hence, banks from different countries competing for the same loans would have to set aside roughly the same amount of capital on the loans. D. Capital Requirements and Capital Calculation under Basel – I Minimum Capital Adequacy ratio was set at 8% and was adjusted by a loan’s credit risk weight. Credit risk was divided into 5 categories viz. 0%, 10%, 20%, 50% and 100%. Commercial loans, for example, were assigned to the 100% risk weight category. To calculate required capital, a bank would multiply the assets in each risk category by the category’s risk weight and then multiply the result by 8%. Thus, a Rs 100 commercial loan would be multiplied by 100% and then by 8%, resulting in a capital requirement of Rs8. E. Criticisms of Basel – I Following are the criticisms of the First Basel Accord (Basel I):†¢ †¢ It took too simplistic an approach to setting credit risk weights and for ignoring other types of risk. Risks weights were based on what the parties to the Accord negotiated rather than on the actual risk of each asset. Risk weights did not flow from any particular insolvency probability standard, and were for the most part, arbitrary. 3 †¢ †¢ †¢ The requirements did not account for the operational and other forms of risk that may also be important. Except for trading account activities, the capital standards did not account for hedging, diversification, and differences in risk management techniques. Advances in technology and finance allowed banks to develop their own capital allocation models in the 1990’s. This resulted in more accurate calculation of bank capital than possible under Basel I. These models allowed banks to align the amount of risk they undertook on a loan with the overall goals of the bank. Internal models allow banks to more finely differentiate risks of individual loans than is possible under Basel – I. It facilitates risks to be differentiated within loan categories and between loan categories and also allows the application of a capital charge to each loan, rather than each category of loan. F. New Approach to Risk-Based Capital †¢ †¢ †¢ By the late 1990’s, growth in the use of regulatory capital arbitrage led the Basel Committee to begin work on a new capital regime (Basel II) Effort focused on using banks’ internal rating models and internal risk models June 1999: The Basel Committee issued a proposal for a new capital adequacy framework to replace Basel – I. In order to overcome the criticisms of Basel – I and for adoption of the new approach to riskbased capital, Basel II guidelines were introduced. G. Structure of Basel – II Basel – II adopts a three pillar approach: †¢ †¢ †¢ Pillar I – Minimum Capital Requirement (Addressing Credit Risk, Operational Risk Market Risk) Pillar II – Supervisory Review (Provides Framework for Systematic Risk, Liquidity Risk Legal Risk) Pillar III – Market Discipline Disclosure (To promote greater stability in the financial system) II. The Three Pillar Approach The first pillar establishes a way to quantify the minimum capital requirements. The main objective of Pillar I is to align capital the adequacy ratios to the risk sensitivity of the assets affording a greater flexibility in the computation of banks’ individual risk. Capital Adequacy Ratio is defined as the amount of regulatory capital to be maintained by a bank to account for various risks inbuilt in the banking system. The focus of Capital Adequacy Ratio under Basel I norms was on credit risk and was calculated as follows: Capital Adequacy Ratio = Tier I Capital+Tier II Capital Risk Weighted Assets Basel Committee has revised the guidelines in the year June 2001 known as Basel II Norms. Capital Adequacy Ratio in New Accord of Basel II: Capital Adequacy Ratio = Total Capital (Tier I Capital+Tier II Capital) Market Risk(RWA) + Credit Risk(RWA) + Operation Risk(RWA) *RWA = Risk Weighted Assets Calculation of Capital Adequacy Ratio: Total Capital: Total Capital constitutes of Tier I Capital and Tier II Capital less shareholding in other banks. Tier I Capital = Ordinary Capital + Retained Earnings Share Premium – Intangible assets. Tier II Capital = Undisclosed Reserves + General Bad Debt Provision+ Revaluation Reserve+ Subordinate debt+ Redeemable Preference shares Tier III Capital: Tier III Capital includes subordinate debt with a maturity of at least 2 years. This is addition or substitution to the Tier II Capital to cover market risk alone. Tier III Capital should not cover more than 250% of Tier I capital allocated to market risk. A. First Pillar : Minimum Capital Requirement B. Types of Risks under Pillar I . Credit Risk Credit risk is the risk of loss due to a debtor’s non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). Basel II envisages two different ways of measuring credit risk which are standarised approach, Internal Rating-Based Approach. The Standardised Approach The standardized approach is conceptually the same as the present Accord, but is more ri sk sensitive. Under this approach the banks are required to use ratings from External Credit Rating Agencies to quantify required capital for credit risk. The Internal Ratings Based Approach (IRB) Under the IRB approach, different methods will be provided for different types of loan exposures. Basically there are two methods for risk measurement which are Foundation IRB and Advanced IRB. The framework allows for both a foundation method in which a bank estimate the probability of default associated with each borrower, and the supervisors will 5 supply the other inputs and an advanced IRB approach, in which a bank will be permitted to supply other necessary inputs as well. Under both the foundation and advanced IRB approaches, the range of risk weights will be far more diverse than those in the standardized approach, resulting in greater risk sensitivity. 2. Operational Risk An operational risk is a risk arising from execution of a company’s business functions. As such, it is a very broad concept including e. g. fraud risk, legal risk, physical or environmental risks, etc. Basel II defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Although the risks apply to any organization in business, this particular risk is of particular relevance to the banking regime where regulators are responsible for establishing safeguards to protect against systematic failure of the banking system and the economy. Banks will be able to choose between three ways of calculating the capital charge for operational risk – the Basic Indicator Approach, the Standardized Approach and the advanced measurement Approaches. 3. Market Risk Market risk is the risk that the value of a portfolio, either an nvestment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices. The preferred approach is VAR(value at risk). C. The Second Pillar : Supervisory Review Process Supervisory review process has been introduced to ensure not only that banks have adequate capital to support all th e risks, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. The process has four key principles – a) Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels. b) Supervisors should review and evaluate bank’s internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. c) Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. ) Supervisors should seek to intervene at an early stage to prevent capital from falling below minimum level and should require rapid remedial action if capital is not mentioned or restored. D. The Third Pillar : Market Discipline Market discipline imposes strong incentives to banks to conduct their business in a safe, sound and effective manner. It is proposed to be effected through a series of disclosure requirements on capital, risk exposure etc. so that market participants can assess a bank’s capital adequacy. These disclosures should be made at least semiannually and more frequently if appropriate. Qualitative disclosures such as risk management objectives and policies, definitions etc. may be published annually. 6 III. Capital Arbitrage and Core Effect of Basel II Regulatory arbitrage is where a regulated institution takes advantage of the difference between its real (or economic) risk and the regulatory position. Securitization is the main means used by Banks to engage in Regulatory Capital Arbitrage. Example of Capital Arbitrage is given below: A. Capital Arbitrage †¢ Assume a bank has a portfolio of commercial loans with the following ratings and internally generated capital requirements – AA-A: 3%-4% capital needed – B+-B: 8% capital needed – B- and below: 12%-16% capital needed Under Basel I, the bank has to hold 8% risk-based capital against all of these loans To ensure the profitability of the better quality loans, the bank engages in capital arbitrage, it securitizes the loans so that they are reclassified into a lower regulatory risk category with a lower capital charge Lower quality loans with higher internal capital charges are kept on the bank’s books because they require less risk-based capital than the bank’s internal model indicates. †¢ †¢ †¢ B. Bank Loan Rating under Basel – II Capital Adequacy Framework †¢ On April 27, 2007, the Reserve Bank of India released the final guidelines for implementation of the New Capital Adequacy Framework (Basel II) applicable to the Banking system of the country The new framework mandates that the amount of capital provided by a bank against any loan and facility will be based on the credit rating assigned to the loan issue by an external rating agency. This means that a loan and a facility with a higher credit rating will attract a lower risk weight than one with a lower credit rating. †¢ †¢ Illustration of capital-saving potential by banks on a loan of Rs 1000 million Rating Basel I Basel II Capital Saved (Rs Long Short Risk Capital Risk Capital Million) Term Term Weight Required* Weight Required Rating Rating (Rs Million) (Rs Million) AAA P1+ 100% 90 20% 18 72 AA P1 100% 90 30% 27 63 A P2 100% 90 50% 45 45 BBB P3 100% 90 100% 90 0 BB P4 P5 100% 90 150% 135 (45) below Unrated Unrated 100% 90 100% 90 0 *Capital required is computed as Loan Amount ? Risk Weight ? 9% C. Effect of Basel – II on Bank Loan Rating †¢ †¢ Banks would either prefer that the Borrower should get itself rated, or, It would prefer that the borrowing institution should pay a higher rate of interest to compensate for the loss. 7 To substantiate the above fact, following example is taken in respect of a strong company: Loan of Rating AAA is taken of Rs 100 Crores @ 12% interest rate Capital Adequacy Rating Risk % Capital Required Opportunity Ratio (Rs Crores) Interest lost by the Bank (Rs Crores) C. A. R. Unrated 100% 9. 00 1. 08 C. A. R. New 20% 1. 80 0. 22 Total Opportunity Interest lost by the Bank (Rs Crores) 0. 86 Hence, Banks would resort to the above-mentioned measures in order to reduce or curb this loss on opportunity interest. Worse affected by this action taken by Banks would be the weaker companies. They would either be charged a higher rate of interest on loans to compensate for the loss or would alternatively have to approach another bank charging a lower rate of interest. The ideal solution to this problem would be that a weaker company should get itself rated and also take steps in order to have a better credit rating. Credit Rating is an evaluation of credit worthiness of a person, company or instrument. Thus, it indicates their willingness to pay for the obligation and the net worth. IV. Basel II in India A. Implementation The deadline for implementing the base approach of Basel II norms in India, was originally set for March 31, 2007. Later the RBI extended the deadline for Foreign banks in India and Indian banks operating abroad to meet those norms by March 31, 2008, while all other scheduled commercial banks were to adhere to the guidelines by March 31, 2009. Later the RBI confirmed that all commercial banks were Basel II compliant by March 31, 2009. Keeping in view the likely lead time that may be needed by the banks for creating the requisite technological and the risk management infrastructure, including the required databases, the MIS and the skill up-gradation, etc. , RBI has proposed the implementation of the advanced approaches under Basel II in a phased manner starting from April 1, 2010 B. Impact on Indian Banks Basel II allows national regulators to specify risk weights different from the internationally recommended ones for retail exposures. The RBI had, therefore, announced an indicative set of weights for domestic corporate long-term loans and 8 bonds subject to different ratings by international rating agencies such as Moody’s Investor Services which are slightly different from that specified by the Basel Committee (Table 1). C. Impact on various elements of the investment portfolio of banks The bonds and debentures portfolio of the banks consist of investments into higher rated companies, hence the corporate assets measured using the standardised approach may be exposed to slightly lower risk weights in comparison with the 100 per cent risk weights assigned under Basel I. The Indian banks have a large short-term portfolio in the form of cash credit, overdraft and working capital demand loans, which were un-rated, and carried a risk weight of 100 per cent under the Basel I regime. They also have short-term investments in commercial papers in their investment portfolio, which also carried a 100 per cent risk weight. The RBI’s capital adequacy guidelines has prescribed lower risk weights for short-tem exposures, if these are rated (Table 2). This provides the banks with an opportunity to benefit from their investments in commercial paper (which are typically rated in A1+/A1 category) and give them the potential to exploit the proposed short-term credit risk weights by obtaining short-term ratings for exposures in the form of cash credit, overdraft and working capital loans. The net result is that the implementation of Basel II provided Indian banks with the opportunity to significantly reduce their credit risk weights and reduce their required regulatory capital, if they suitably adjust their portfolio by lending to rated but strong corporate and increase their retail lending. According to some reports, most of the Indian banks who have migrated to Basel II have reported a reduction in their total Capital Adequacy Ratios (CARs). However, a few banks, those with high exposures to higher rated corporate or to the regulatory retail portfolio, have reported increased CARs. However, a recent study by New Delhi-based industry lobby group Assocham has concluded that Capital Adequacy Ratio (CAR) of a group of commercial banks, which were part of the study improved to 13. 48% in 2008-09 from 12. 35% in 2007-08, due to lower risk weights, implementation of Basel II norms and slower credit growth. 9 D. Bad debts and requirement of additional capital In this context, the situation regarding bad debts and NPA’s is very pertinent. The proportion of total NPAs to total advances declined from 23. 2 per cent in March 1993 to 7. per cent in March, 2004. The improvement in terms of NPAs has been largely the result of provisioning or infusion of capital. This meant that if the banks required more capital, as they would to implement Basel II norms, they would have to find capital outside of their own or the governmentâ₠¬â„¢s resources. ICRA has estimated that, Indian banks would need additional capital of up to Rs. 12,000 crore to meet the capital charge requirement for operational risk under Basel II. Most of this capital would be required by PSBs Rs. 9,000 crore, followed by the new generation private sector banks Rs. 1,100 crore, and the old generation private sector bank Rs. 750 crore. In practice, to deal with this, a large number of banks have been forced to turn to the capital market to meet their additional regulatory capital requirements. ICICI Bank, for example, has raised around Rs. 3,500 crore, thus improving its Tier I capital significantly. Many of the PSBs, namely, Punjab National Bank, Bank of India, Bank of Baroda and Dena Bank, besides private sector banks such as UTI Bank have either already tapped the market or have announced plans to raise equity capital in order to boost their Tier I capital. E. Government Policy on foreign investment The need to go public and raise capital challenged the government policy aimed at restricting concentration of share ownership, maintaining public dominance and limiting foreign influence in the banking sector. One immediate fallout was that PSBs being permitted to dilute the government’s stake to 51 per cent, and the pressure to reduce this to 33 per cent increased. Secondly, the government allowed private banks to expand equity by accessing capital from foreign investors. This put pressure on the RBI to rethink its policy on the ownership structure of domestic banks. In the past the RBI has emphasised the risks of concentrated foreign ownership of banking assets in India. Subsequent to a notification issued by the Government, which had raised the FDI limit in private sector banks to 74 per cent under the automatic route, a comprehensive set of policy guidelines on ownership of private banks was issued by the RBI. These guidelines stated, among other things, that no single entity or group of related entities would be allowed to hold shares or exercise control, directly or indirectly, in any private sector bank in excess of 10 per cent of its paid-up capital. F. Threat of foreign takeover There has been growing pressure to consolidate domestic banks to make them capable of facing international competition. Indian banks are pigmies compared with the global majors. India’s biggest bank, the State Bank of India, which accounts for onefifth of the total banking assets in the country, is roughly one-fifth as large as the world’s biggest bank Citigroup. Given this difference, even after consolidation of 10 omestic banks, the threat of foreign takeover remains if FDI policy with respect to the banking sector is relaxed. Not surprisingly, a number of foreign banks have already evinced an interest in acquiring a stake in Indian banks. Thus, it appears that foreign bank presence and consoli dation of banking are inevitable post Basel II. V. Conclusion A. SWOT Analysis of Basel II in Indian Banking Context Strenghts †¢ †¢ Aggression towards development of the existing standards by banks. Strong regulatory impact by central bank to all the banks for implementation. Presence of intellectual capital to face the change in implementation with good quality. †¢ †¢ †¢ Weaknesses Poor Technology Infrastructure Ineffective Risk Measures Presence of more number of Smaller banks that would likely to be impacted adversely. †¢ Opportunities †¢ †¢ Increasing Risk Management Expertise. Need significant connection among business,credit and risk management and Information Technology. Advancement of Technologies. Strong Asset Base would help in bigger growth. †¢ †¢ Threats Inability to meet the additional Capital Requirements Loss of Capital to the entire banking system, due to Mergers and acquisitions. Huge Investments in technologies †¢ †¢ †¢ B. Challenges going ahead under Basel II †¢ The new norms will almost invariably increase capital requirement in all banks across the board. Although capital requirement for credit risk may go down due to adoption of more risk sensitive models – such advantage will be more than offset by additional capital charge for operational risk and increased capital requirement for market risk. This partly explains the current trend of consolidation in the banking industry. Competition among banks for highly rated corporates needing lower amount of capital may exert pressure on already thinning interest spread. Further, huge implementation cost may also impact profitability for smaller banks. The biggest challenge is the re-structuring of the assets of some of the banks as it would be a tedious process, since most of the banks have poor asset quality leading to significant proportion of NPA. This also may lead to Mergers Acquisitions, which itself would be loss of capital to entire system. The new norms seem to favor the large banks that have better risk management and measurement expertise, who also have better capital adequacy ratios and geographically diversified portfolios. The smaller banks are also likely to be hurt by the rise in weightage †¢ †¢ †¢ 11 of inter-bank loans that will effectively price them out of the market. Thus, banks will have to re-structure and adopt if they are to survive in the new environment. †¢ Since improved risk management and measurement is needed, it aims to give impetus to the use of internal rating system by the international banks. More and more banks may have to use internal model developed in house and their impact is uncertain. Most of these models require minimum historical bank data that is a tedious and high cost process, as most Indian banks do not have such a database. The technology infrastructure in terms of computerization is still in a nascent stage in most Indian banks. Computerization of branches, especially for those banks, which have their network spread out in remote areas, will be a daunting task. Penetration of information technology in banking has been successful in the urban areas, unlike in the rural areas where it is insignificant. An integrated risk management concept, which is the need of the hour to align market, credit and operational risk, will be difficult due to significant disconnect between business, risk managers and IT across the organizations in their existing set-up. Implementation of the Basel II will require huge investments in technology. According to estimates, Indian banks, especially those with a sizeable branch network, will need to spend well over $ 50-70 Million on this. Computation of probability of default, loss given default, migration mapping and supervisory validation require creation of historical database, which is a time consuming process and may require initial support from the supervisor. With the implementation of the new framework, internal auditors may become increasingly involved in various processes, including validation and of the accuracy of the data inputs, review of activities performed by credit functions and assessment of a bank’s capital assessment process. Pillar 3 purports to enforce market discipline through stricter disclosure requirement. While admitting that such disclosure may be useful for supervisory authorities and rating agencies, the expertise and ability of the general public to comprehend and interpret disclosed information is open to question. Moreover, too much disclosure may cause information overload and may even damage financial position of bank. Basel II proposals underscore the interaction between sound risk management practices and corporate good governance. The bank’s board of directors has the responsibility for setting the basic tolerance levels for various types of risk. It should also ensure that management establishes a framework for assessing the risks, develop a system to relate risk to the bank’s capital levels and establish a method for monitoring compliance with internal policies. The risk weighting scheme under Standardised Approach also creates some incentive for some of the bank clients to remain unrated since such entities receive a lower risk weight of 100 per cent vis-a-vis 150 per cent risk weight for a lowest rated client. This might specially be the case if the unrated client expects a poor rating. The banks will need to be watchful in this regard. †¢ †¢ †¢ †¢ †¢ †¢ †¢ †¢ We can conclude by saying that the Basel II framework provides significant incentives to banks to sharpen their risk management expertise to enable more efficient risk-return tradeoffs, it also presents a valuable opportunity to gear up their internal processes to the 12 international best standards. This would require substantial capacity building and commitment of resources through close involvement of the banks’ Top Management in guiding this arduous undertaking. Notwithstanding intense competition, the expansionary phase of the economy is expected to provide ample opportunities for the growth of the banking industry. The growth trajectory, adherence to global best practices and risk management norms are likely to catapult the Indian Banks onto the global map, making them a force to reckon with. VI. References 1. The Evolution to Basel II by Donald Inscoe, Deputy Director, Division of Insurance and Research, US Federal Deposit Insurance Corporation. 2. Basel II – Challenges Ahead of the Indian Banking Industry by Jagannath Mishra and Pankaj Kumar Kalawatia. 3. Basel II Norms and Credit Ratings by CA Sangeet Kumar Gupta. 4. The Business Line Magazine. 5. The Chartered Accountant – Journal of the Institute of Chartered Accountants of India. 6. www. bis. org 7. www. rbi. org. in 8. www. wikipedia. org 9. www. google. com VII. The Technical Paper Presentation Team Name of Member Email ID’s rahulscsharma@icai. org tulsyan. abhishek@yahoo. co. in sikha. kedia0311@gmail. com ca. gouravmodi@gmail. com Praveen_did@yahoo. com 1. Rahul Sharma 2. Abhishek Tulsyan 3. Sikha Kedia 4. Gourav Modi 5. Praveen Didwania 13 Basel Norms in India Basel Norms in India Basel Norms in India B. C. D. E. F. G. Background Functions of Basel Committee The Evolution to Basel II – First Basel Accord Capital Requirements and Capital Calculation under Basel I Criticisms of Basel I New Approach to Risk Based Capital Structure of Basel II First Pillar : Minimum Capital Requirement Types of Risks under Pillar I The Second Pillar : Supervisory Review Process The Third Pillar : Market Discipline 3 3 3 3 3 4 4 II. The Three Pillar Approach A. B. C. D. 5 5 6 6 7 7 7 III. Capital Arbitrage and Core Effect of Basel II A. Capital Arbitrage B. Bank Loan Rating under Basel II Capital Adequacy Framework C. Effect of Basel II on Bank Loan Rating IV. Basel II in India A. Implementation C. Impact on Indian Banks D. Impact on Various Elements of Investment Portfolio of Banks E. Impact on Bad Debts and NPA’s of Indian Banks D. Government Policy on Foreign Investment E. Threat of Foreign Takeover 8 8 9 10 10 10 V. Conclusion A. SWOT Analysis of Basel II in Indian Banking Context B. Challenges going ahead under Basel II 11 11 13 13 VI. VII. References The Technical Paper Presentation Team 2 I. Introduction: A. Background Basel II is a new capital adequacy framework applicable to Scheduled Commercial Banks in India as mandated by the Reserve Bank of India (RBI). The Basel II guidelines were issued by the Basel Committee on Banking Supervision that was initially published in June 2004. The Accord has been accepted by over 100 countries including India. In April 2007, RBI published the final guidelines for Banks operating in India. Basel II aims to create international standards that deals with Capital Measurement and Capital Standards for Banks which banking regulators can use when creating regulations about how much banks need to put aside to guard against the types of financial and operational risks banks face. The Basel Committee on Banking Supervision was constituted by the Central Bank Governors of the G-10 countries in 1974 consisting of members from Australia, Brazil, Canada, United States, United Kingdom, Spain, India, Japan, etc to name a few. The ommittee regularly meets four times a year at the Bank for International Settlements (BIS) in Basel, Switzerland where its 10 member Secretariat is located. B. Functions of the Basel Committee The purpose of the committee is to encourage the convergence toward common approaches and standards. However, the Basel Committee is not a classical multilateral organisation like World Trade Organisation. It has no founding treaty and it does not issue binding regulat ions. It is rather an informal forum to find policy solutions and promulgate standards. C. The Evolution to Basel II – First Basel Accord The First Basel Accord (Basel I) was completed in 1988. The main features of Basel I were: †¢ †¢ †¢ Set minimum capital standards for banks Standards focused on credit risk, the main risk incurred by banks Became effective end-year 1992 The First Basel Accord aimed at creating a level playing field for internationally active banks. Hence, banks from different countries competing for the same loans would have to set aside roughly the same amount of capital on the loans. D. Capital Requirements and Capital Calculation under Basel – I Minimum Capital Adequacy ratio was set at 8% and was adjusted by a loan’s credit risk weight. Credit risk was divided into 5 categories viz. 0%, 10%, 20%, 50% and 100%. Commercial loans, for example, were assigned to the 100% risk weight category. To calculate required capital, a bank would multiply the assets in each risk category by the category’s risk weight and then multiply the result by 8%. Thus, a Rs 100 commercial loan would be multiplied by 100% and then by 8%, resulting in a capital requirement of Rs8. E. Criticisms of Basel – I Following are the criticisms of the First Basel Accord (Basel I):†¢ †¢ It took too simplistic an approach to setting credit risk weights and for ignoring other types of risk. Risks weights were based on what the parties to the Accord negotiated rather than on the actual risk of each asset. Risk weights did not flow from any particular insolvency probability standard, and were for the most part, arbitrary. 3 †¢ †¢ †¢ The requirements did not account for the operational and other forms of risk that may also be important. Except for trading account activities, the capital standards did not account for hedging, diversification, and differences in risk management techniques. Advances in technology and finance allowed banks to develop their own capital allocation models in the 1990’s. This resulted in more accurate calculation of bank capital than possible under Basel I. These models allowed banks to align the amount of risk they undertook on a loan with the overall goals of the bank. Internal models allow banks to more finely differentiate risks of individual loans than is possible under Basel – I. It facilitates risks to be differentiated within loan categories and between loan categories and also allows the application of a capital charge to each loan, rather than each category of loan. F. New Approach to Risk-Based Capital †¢ †¢ †¢ By the late 1990’s, growth in the use of regulatory capital arbitrage led the Basel Committee to begin work on a new capital regime (Basel II) Effort focused on using banks’ internal rating models and internal risk models June 1999: The Basel Committee issued a proposal for a new capital adequacy framework to replace Basel – I. In order to overcome the criticisms of Basel – I and for adoption of the new approach to riskbased capital, Basel II guidelines were introduced. G. Structure of Basel – II Basel – II adopts a three pillar approach: †¢ †¢ †¢ Pillar I – Minimum Capital Requirement (Addressing Credit Risk, Operational Risk Market Risk) Pillar II – Supervisory Review (Provides Framework for Systematic Risk, Liquidity Risk Legal Risk) Pillar III – Market Discipline Disclosure (To promote greater stability in the financial system) II. The Three Pillar Approach The first pillar establishes a way to quantify the minimum capital requirements. The main objective of Pillar I is to align capital the adequacy ratios to the risk sensitivity of the assets affording a greater flexibility in the computation of banks’ individual risk. Capital Adequacy Ratio is defined as the amount of regulatory capital to be maintained by a bank to account for various risks inbuilt in the banking system. The focus of Capital Adequacy Ratio under Basel I norms was on credit risk and was calculated as follows: Capital Adequacy Ratio = Tier I Capital+Tier II Capital Risk Weighted Assets Basel Committee has revised the guidelines in the year June 2001 known as Basel II Norms. Capital Adequacy Ratio in New Accord of Basel II: Capital Adequacy Ratio = Total Capital (Tier I Capital+Tier II Capital) Market Risk(RWA) + Credit Risk(RWA) + Operation Risk(RWA) *RWA = Risk Weighted Assets Calculation of Capital Adequacy Ratio: Total Capital: Total Capital constitutes of Tier I Capital and Tier II Capital less shareholding in other banks. Tier I Capital = Ordinary Capital + Retained Earnings Share Premium – Intangible assets. Tier II Capital = Undisclosed Reserves + General Bad Debt Provision+ Revaluation Reserve+ Subordinate debt+ Redeemable Preference shares Tier III Capital: Tier III Capital includes subordinate debt with a maturity of at least 2 years. This is addition or substitution to the Tier II Capital to cover market risk alone. Tier III Capital should not cover more than 250% of Tier I capital allocated to market risk. A. First Pillar : Minimum Capital Requirement B. Types of Risks under Pillar I . Credit Risk Credit risk is the risk of loss due to a debtor’s non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). Basel II envisages two different ways of measuring credit risk which are standarised approach, Internal Rating-Based Approach. The Standardised Approach The standardized approach is conceptually the same as the present Accord, but is more ri sk sensitive. Under this approach the banks are required to use ratings from External Credit Rating Agencies to quantify required capital for credit risk. The Internal Ratings Based Approach (IRB) Under the IRB approach, different methods will be provided for different types of loan exposures. Basically there are two methods for risk measurement which are Foundation IRB and Advanced IRB. The framework allows for both a foundation method in which a bank estimate the probability of default associated with each borrower, and the supervisors will 5 supply the other inputs and an advanced IRB approach, in which a bank will be permitted to supply other necessary inputs as well. Under both the foundation and advanced IRB approaches, the range of risk weights will be far more diverse than those in the standardized approach, resulting in greater risk sensitivity. 2. Operational Risk An operational risk is a risk arising from execution of a company’s business functions. As such, it is a very broad concept including e. g. fraud risk, legal risk, physical or environmental risks, etc. Basel II defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Although the risks apply to any organization in business, this particular risk is of particular relevance to the banking regime where regulators are responsible for establishing safeguards to protect against systematic failure of the banking system and the economy. Banks will be able to choose between three ways of calculating the capital charge for operational risk – the Basic Indicator Approach, the Standardized Approach and the advanced measurement Approaches. 3. Market Risk Market risk is the risk that the value of a portfolio, either an nvestment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices. The preferred approach is VAR(value at risk). C. The Second Pillar : Supervisory Review Process Supervisory review process has been introduced to ensure not only that banks have adequate capital to support all th e risks, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. The process has four key principles – a) Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels. b) Supervisors should review and evaluate bank’s internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. c) Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. ) Supervisors should seek to intervene at an early stage to prevent capital from falling below minimum level and should require rapid remedial action if capital is not mentioned or restored. D. The Third Pillar : Market Discipline Market discipline imposes strong incentives to banks to conduct their business in a safe, sound and effective manner. It is proposed to be effected through a series of disclosure requirements on capital, risk exposure etc. so that market participants can assess a bank’s capital adequacy. These disclosures should be made at least semiannually and more frequently if appropriate. Qualitative disclosures such as risk management objectives and policies, definitions etc. may be published annually. 6 III. Capital Arbitrage and Core Effect of Basel II Regulatory arbitrage is where a regulated institution takes advantage of the difference between its real (or economic) risk and the regulatory position. Securitization is the main means used by Banks to engage in Regulatory Capital Arbitrage. Example of Capital Arbitrage is given below: A. Capital Arbitrage †¢ Assume a bank has a portfolio of commercial loans with the following ratings and internally generated capital requirements – AA-A: 3%-4% capital needed – B+-B: 8% capital needed – B- and below: 12%-16% capital needed Under Basel I, the bank has to hold 8% risk-based capital against all of these loans To ensure the profitability of the better quality loans, the bank engages in capital arbitrage, it securitizes the loans so that they are reclassified into a lower regulatory risk category with a lower capital charge Lower quality loans with higher internal capital charges are kept on the bank’s books because they require less risk-based capital than the bank’s internal model indicates. †¢ †¢ †¢ B. Bank Loan Rating under Basel – II Capital Adequacy Framework †¢ On April 27, 2007, the Reserve Bank of India released the final guidelines for implementation of the New Capital Adequacy Framework (Basel II) applicable to the Banking system of the country The new framework mandates that the amount of capital provided by a bank against any loan and facility will be based on the credit rating assigned to the loan issue by an external rating agency. This means that a loan and a facility with a higher credit rating will attract a lower risk weight than one with a lower credit rating. †¢ †¢ Illustration of capital-saving potential by banks on a loan of Rs 1000 million Rating Basel I Basel II Capital Saved (Rs Long Short Risk Capital Risk Capital Million) Term Term Weight Required* Weight Required Rating Rating (Rs Million) (Rs Million) AAA P1+ 100% 90 20% 18 72 AA P1 100% 90 30% 27 63 A P2 100% 90 50% 45 45 BBB P3 100% 90 100% 90 0 BB P4 P5 100% 90 150% 135 (45) below Unrated Unrated 100% 90 100% 90 0 *Capital required is computed as Loan Amount ? Risk Weight ? 9% C. Effect of Basel – II on Bank Loan Rating †¢ †¢ Banks would either prefer that the Borrower should get itself rated, or, It would prefer that the borrowing institution should pay a higher rate of interest to compensate for the loss. 7 To substantiate the above fact, following example is taken in respect of a strong company: Loan of Rating AAA is taken of Rs 100 Crores @ 12% interest rate Capital Adequacy Rating Risk % Capital Required Opportunity Ratio (Rs Crores) Interest lost by the Bank (Rs Crores) C. A. R. Unrated 100% 9. 00 1. 08 C. A. R. New 20% 1. 80 0. 22 Total Opportunity Interest lost by the Bank (Rs Crores) 0. 86 Hence, Banks would resort to the above-mentioned measures in order to reduce or curb this loss on opportunity interest. Worse affected by this action taken by Banks would be the weaker companies. They would either be charged a higher rate of interest on loans to compensate for the loss or would alternatively have to approach another bank charging a lower rate of interest. The ideal solution to this problem would be that a weaker company should get itself rated and also take steps in order to have a better credit rating. Credit Rating is an evaluation of credit worthiness of a person, company or instrument. Thus, it indicates their willingness to pay for the obligation and the net worth. IV. Basel II in India A. Implementation The deadline for implementing the base approach of Basel II norms in India, was originally set for March 31, 2007. Later the RBI extended the deadline for Foreign banks in India and Indian banks operating abroad to meet those norms by March 31, 2008, while all other scheduled commercial banks were to adhere to the guidelines by March 31, 2009. Later the RBI confirmed that all commercial banks were Basel II compliant by March 31, 2009. Keeping in view the likely lead time that may be needed by the banks for creating the requisite technological and the risk management infrastructure, including the required databases, the MIS and the skill up-gradation, etc. , RBI has proposed the implementation of the advanced approaches under Basel II in a phased manner starting from April 1, 2010 B. Impact on Indian Banks Basel II allows national regulators to specify risk weights different from the internationally recommended ones for retail exposures. The RBI had, therefore, announced an indicative set of weights for domestic corporate long-term loans and 8 bonds subject to different ratings by international rating agencies such as Moody’s Investor Services which are slightly different from that specified by the Basel Committee (Table 1). C. Impact on various elements of the investment portfolio of banks The bonds and debentures portfolio of the banks consist of investments into higher rated companies, hence the corporate assets measured using the standardised approach may be exposed to slightly lower risk weights in comparison with the 100 per cent risk weights assigned under Basel I. The Indian banks have a large short-term portfolio in the form of cash credit, overdraft and working capital demand loans, which were un-rated, and carried a risk weight of 100 per cent under the Basel I regime. They also have short-term investments in commercial papers in their investment portfolio, which also carried a 100 per cent risk weight. The RBI’s capital adequacy guidelines has prescribed lower risk weights for short-tem exposures, if these are rated (Table 2). This provides the banks with an opportunity to benefit from their investments in commercial paper (which are typically rated in A1+/A1 category) and give them the potential to exploit the proposed short-term credit risk weights by obtaining short-term ratings for exposures in the form of cash credit, overdraft and working capital loans. The net result is that the implementation of Basel II provided Indian banks with the opportunity to significantly reduce their credit risk weights and reduce their required regulatory capital, if they suitably adjust their portfolio by lending to rated but strong corporate and increase their retail lending. According to some reports, most of the Indian banks who have migrated to Basel II have reported a reduction in their total Capital Adequacy Ratios (CARs). However, a few banks, those with high exposures to higher rated corporate or to the regulatory retail portfolio, have reported increased CARs. However, a recent study by New Delhi-based industry lobby group Assocham has concluded that Capital Adequacy Ratio (CAR) of a group of commercial banks, which were part of the study improved to 13. 48% in 2008-09 from 12. 35% in 2007-08, due to lower risk weights, implementation of Basel II norms and slower credit growth. 9 D. Bad debts and requirement of additional capital In this context, the situation regarding bad debts and NPA’s is very pertinent. The proportion of total NPAs to total advances declined from 23. 2 per cent in March 1993 to 7. per cent in March, 2004. The improvement in terms of NPAs has been largely the result of provisioning or infusion of capital. This meant that if the banks required more capital, as they would to implement Basel II norms, they would have to find capital outside of their own or the governmentâ₠¬â„¢s resources. ICRA has estimated that, Indian banks would need additional capital of up to Rs. 12,000 crore to meet the capital charge requirement for operational risk under Basel II. Most of this capital would be required by PSBs Rs. 9,000 crore, followed by the new generation private sector banks Rs. 1,100 crore, and the old generation private sector bank Rs. 750 crore. In practice, to deal with this, a large number of banks have been forced to turn to the capital market to meet their additional regulatory capital requirements. ICICI Bank, for example, has raised around Rs. 3,500 crore, thus improving its Tier I capital significantly. Many of the PSBs, namely, Punjab National Bank, Bank of India, Bank of Baroda and Dena Bank, besides private sector banks such as UTI Bank have either already tapped the market or have announced plans to raise equity capital in order to boost their Tier I capital. E. Government Policy on foreign investment The need to go public and raise capital challenged the government policy aimed at restricting concentration of share ownership, maintaining public dominance and limiting foreign influence in the banking sector. One immediate fallout was that PSBs being permitted to dilute the government’s stake to 51 per cent, and the pressure to reduce this to 33 per cent increased. Secondly, the government allowed private banks to expand equity by accessing capital from foreign investors. This put pressure on the RBI to rethink its policy on the ownership structure of domestic banks. In the past the RBI has emphasised the risks of concentrated foreign ownership of banking assets in India. Subsequent to a notification issued by the Government, which had raised the FDI limit in private sector banks to 74 per cent under the automatic route, a comprehensive set of policy guidelines on ownership of private banks was issued by the RBI. These guidelines stated, among other things, that no single entity or group of related entities would be allowed to hold shares or exercise control, directly or indirectly, in any private sector bank in excess of 10 per cent of its paid-up capital. F. Threat of foreign takeover There has been growing pressure to consolidate domestic banks to make them capable of facing international competition. Indian banks are pigmies compared with the global majors. India’s biggest bank, the State Bank of India, which accounts for onefifth of the total banking assets in the country, is roughly one-fifth as large as the world’s biggest bank Citigroup. Given this difference, even after consolidation of 10 omestic banks, the threat of foreign takeover remains if FDI policy with respect to the banking sector is relaxed. Not surprisingly, a number of foreign banks have already evinced an interest in acquiring a stake in Indian banks. Thus, it appears that foreign bank presence and consoli dation of banking are inevitable post Basel II. V. Conclusion A. SWOT Analysis of Basel II in Indian Banking Context Strenghts †¢ †¢ Aggression towards development of the existing standards by banks. Strong regulatory impact by central bank to all the banks for implementation. Presence of intellectual capital to face the change in implementation with good quality. †¢ †¢ †¢ Weaknesses Poor Technology Infrastructure Ineffective Risk Measures Presence of more number of Smaller banks that would likely to be impacted adversely. †¢ Opportunities †¢ †¢ Increasing Risk Management Expertise. Need significant connection among business,credit and risk management and Information Technology. Advancement of Technologies. Strong Asset Base would help in bigger growth. †¢ †¢ Threats Inability to meet the additional Capital Requirements Loss of Capital to the entire banking system, due to Mergers and acquisitions. Huge Investments in technologies †¢ †¢ †¢ B. Challenges going ahead under Basel II †¢ The new norms will almost invariably increase capital requirement in all banks across the board. Although capital requirement for credit risk may go down due to adoption of more risk sensitive models – such advantage will be more than offset by additional capital charge for operational risk and increased capital requirement for market risk. This partly explains the current trend of consolidation in the banking industry. Competition among banks for highly rated corporates needing lower amount of capital may exert pressure on already thinning interest spread. Further, huge implementation cost may also impact profitability for smaller banks. The biggest challenge is the re-structuring of the assets of some of the banks as it would be a tedious process, since most of the banks have poor asset quality leading to significant proportion of NPA. This also may lead to Mergers Acquisitions, which itself would be loss of capital to entire system. The new norms seem to favor the large banks that have better risk management and measurement expertise, who also have better capital adequacy ratios and geographically diversified portfolios. The smaller banks are also likely to be hurt by the rise in weightage †¢ †¢ †¢ 11 of inter-bank loans that will effectively price them out of the market. Thus, banks will have to re-structure and adopt if they are to survive in the new environment. †¢ Since improved risk management and measurement is needed, it aims to give impetus to the use of internal rating system by the international banks. More and more banks may have to use internal model developed in house and their impact is uncertain. Most of these models require minimum historical bank data that is a tedious and high cost process, as most Indian banks do not have such a database. The technology infrastructure in terms of computerization is still in a nascent stage in most Indian banks. Computerization of branches, especially for those banks, which have their network spread out in remote areas, will be a daunting task. Penetration of information technology in banking has been successful in the urban areas, unlike in the rural areas where it is insignificant. An integrated risk management concept, which is the need of the hour to align market, credit and operational risk, will be difficult due to significant disconnect between business, risk managers and IT across the organizations in their existing set-up. Implementation of the Basel II will require huge investments in technology. According to estimates, Indian banks, especially those with a sizeable branch network, will need to spend well over $ 50-70 Million on this. Computation of probability of default, loss given default, migration mapping and supervisory validation require creation of historical database, which is a time consuming process and may require initial support from the supervisor. With the implementation of the new framework, internal auditors may become increasingly involved in various processes, including validation and of the accuracy of the data inputs, review of activities performed by credit functions and assessment of a bank’s capital assessment process. Pillar 3 purports to enforce market discipline through stricter disclosure requirement. While admitting that such disclosure may be useful for supervisory authorities and rating agencies, the expertise and ability of the general public to comprehend and interpret disclosed information is open to question. Moreover, too much disclosure may cause information overload and may even damage financial position of bank. Basel II proposals underscore the interaction between sound risk management practices and corporate good governance. The bank’s board of directors has the responsibility for setting the basic tolerance levels for various types of risk. It should also ensure that management establishes a framework for assessing the risks, develop a system to relate risk to the bank’s capital levels and establish a method for monitoring compliance with internal policies. The risk weighting scheme under Standardised Approach also creates some incentive for some of the bank clients to remain unrated since such entities receive a lower risk weight of 100 per cent vis-a-vis 150 per cent risk weight for a lowest rated client. This might specially be the case if the unrated client expects a poor rating. The banks will need to be watchful in this regard. †¢ †¢ †¢ †¢ †¢ †¢ †¢ †¢ We can conclude by saying that the Basel II framework provides significant incentives to banks to sharpen their risk management expertise to enable more efficient risk-return tradeoffs, it also presents a valuable opportunity to gear up their internal processes to the 12 international best standards. This would require substantial capacity building and commitment of resources through close involvement of the banks’ Top Management in guiding this arduous undertaking. Notwithstanding intense competition, the expansionary phase of the economy is expected to provide ample opportunities for the growth of the banking industry. The growth trajectory, adherence to global best practices and risk management norms are likely to catapult the Indian Banks onto the global map, making them a force to reckon with. VI. References 1. The Evolution to Basel II by Donald Inscoe, Deputy Director, Division of Insurance and Research, US Federal Deposit Insurance Corporation. 2. Basel II – Challenges Ahead of the Indian Banking Industry by Jagannath Mishra and Pankaj Kumar Kalawatia. 3. Basel II Norms and Credit Ratings by CA Sangeet Kumar Gupta. 4. The Business Line Magazine. 5. The Chartered Accountant – Journal of the Institute of Chartered Accountants of India. 6. www. bis. org 7. www. rbi. org. in 8. www. wikipedia. org 9. www. google. com VII. The Technical Paper Presentation Team Name of Member Email ID’s rahulscsharma@icai. org tulsyan. abhishek@yahoo. co. in sikha. kedia0311@gmail. com ca. gouravmodi@gmail. com Praveen_did@yahoo. com 1. Rahul Sharma 2. Abhishek Tulsyan 3. Sikha Kedia 4. Gourav Modi 5. Praveen Didwania 13