Basel Accords
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The Basel Accords are a set of international banking regulations and standards developed by the Basel Committee on Banking Supervision, which is a global committee of banking supervisory authorities. The accords aim to enhance the stability and soundness of the global banking system by establishing minimum capital requirements and promoting effective risk management practices.
Basel I: Basel I was introduced in 1988 and focused primarily on credit risk. It established the concept of risk-weighted assets to determine minimum capital requirements for banks. Under Basel I, banks were required to maintain a minimum capital adequacy ratio of 8% based on their risk-weighted assets.
Basel II: Basel II, introduced in 2004, expanded the scope of regulation and introduced a more comprehensive approach to risk management. It categorised risks into three main types: credit risk, market risk, and operational risk. Basel II provided more detailed guidelines for assessing and managing these risks, and it allowed banks to use internal models to calculate risk-weighted assets. It also introduced Pillar 2, which emphasised supervisory review and market discipline.
Basel III: Basel III, introduced in response to the 2008 global financial crisis, aimed to strengthen the banking sector's resilience and risk management. It introduced higher capital requirements, enhanced risk coverage, and introduced new liquidity standards. Basel III included stricter capital ratios, such as the Common Equity Tier 1 capital ratio, which increased the quality and quantity of capital banks are required to hold. It also introduced the liquidity coverage ratio and the net stable funding ratio to promote liquidity risk management.
The Basel Accords provide a framework for banks and regulatory authorities to promote financial stability and strengthen the banking sector's resilience. They help ensure that banks maintain adequate capital levels to absorb losses, manage risk effectively, and foster greater transparency and stability in the global financial system. The accords have been widely adopted by many countries, although their implementation may vary across jurisdictions.
Basel I: Basel I was introduced in 1988 and focused primarily on credit risk. It established the concept of risk-weighted assets to determine minimum capital requirements for banks. Under Basel I, banks were required to maintain a minimum capital adequacy ratio of 8% based on their risk-weighted assets.
Basel II: Basel II, introduced in 2004, expanded the scope of regulation and introduced a more comprehensive approach to risk management. It categorised risks into three main types: credit risk, market risk, and operational risk. Basel II provided more detailed guidelines for assessing and managing these risks, and it allowed banks to use internal models to calculate risk-weighted assets. It also introduced Pillar 2, which emphasised supervisory review and market discipline.
Basel III: Basel III, introduced in response to the 2008 global financial crisis, aimed to strengthen the banking sector's resilience and risk management. It introduced higher capital requirements, enhanced risk coverage, and introduced new liquidity standards. Basel III included stricter capital ratios, such as the Common Equity Tier 1 capital ratio, which increased the quality and quantity of capital banks are required to hold. It also introduced the liquidity coverage ratio and the net stable funding ratio to promote liquidity risk management.
The Basel Accords provide a framework for banks and regulatory authorities to promote financial stability and strengthen the banking sector's resilience. They help ensure that banks maintain adequate capital levels to absorb losses, manage risk effectively, and foster greater transparency and stability in the global financial system. The accords have been widely adopted by many countries, although their implementation may vary across jurisdictions.
