Basel Accords

Basel Accords

The Basel Accords are a set of international banking regulations developed by the Basel Committee on Banking Supervision (BCBS), which provide recommendations on banking regulations in regards to capital risk, market risk, and operational risk. The Basel Accords aim to enhance the understanding of key supervisory issues and improve the quality of banking supervision worldwide.

History

The Basel Committee on Banking Supervision was established by the central bank governors of the Group of Ten countries in 1974. The committee's first meeting took place in Basel, Switzerland, which is how the accords got their name. The Basel Accords have evolved over time, with three major iterations: Basel I, Basel II, and Basel III.

Basel I

Basel I, introduced in 1988, focused primarily on credit risk and the capital adequacy of financial institutions. It established a minimum capital requirement of 8% of risk-weighted assets. The main objective was to ensure that banks held enough capital to cover their risks and to promote stability in the international banking system.

Key Features of Basel I

• Introduction of the concept of risk-weighted assets.
• Minimum capital requirement of 8%.
• Focus on credit risk.

Basel II

Basel II, published in 2004, expanded on Basel I by including operational risk and refining the treatment of credit risk. It introduced a three-pillar approach:

Pillar 1: Minimum Capital Requirements

This pillar retained the minimum capital requirement of 8% but introduced more sophisticated methods for calculating credit risk, including the Internal Ratings-Based (IRB) approach.

Pillar 2: Supervisory Review Process

This pillar emphasized the importance of regulatory review and encouraged banks to develop better risk management techniques.

Pillar 3: Market Discipline

This pillar aimed to improve transparency in the banking sector by requiring banks to disclose their risk exposures and capital adequacy.

Basel III

Basel III, developed in response to the financial crisis of 2007-2008, introduced more stringent capital requirements and new regulatory requirements on bank liquidity and leverage.

Key Features of Basel III

• Increased minimum capital requirements.
• Introduction of the Capital Conservation Buffer and Countercyclical Buffer.
• Leverage Ratio requirement.
• Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

Impact and Criticism

The Basel Accords have significantly influenced global banking regulation, promoting greater stability and consistency across international banking systems. However, they have also faced criticism for being too complex and for potentially stifling economic growth by imposing stringent capital requirements.

See Also

• Banking regulation
• Financial crisis of 2007–2008
• Risk management

References

• Basel Committee on Banking Supervision. "History of the Basel Committee." Bank for International Settlements.
• "Basel III: A global regulatory framework for more resilient banks and banking systems." Bank for International Settlements.