Basel I
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Basel I, also known as the Basel Accord, is an international regulatory framework for banking supervision developed by the Basel Committee on Banking Supervision. It was introduced in 1988 with the goal of promoting stability in the international banking system by establishing minimum capital requirements for banks.
Minimum capital requirements: Basel I sets out a minimum capital requirement for banks based on a percentage of their risk-weighted assets. Under this framework, different types of assets are assigned fixed risk weights to determine the amount of capital banks need to hold against their exposures. For example, corporate loans may have a risk weight of 100%, meaning banks must hold capital equal to at least 8% of the value of those loans.
Simplicity: Basel I was designed to be a simple and standardised framework that could be easily implemented by banks and regulators worldwide. It provided a straightforward method for calculating capital requirements based on broad categories of assets, such as corporate loans, government bonds, and cash.
Credit risk focus: Basel I primarily addresses credit risk, which is the risk of borrowers defaulting on their obligations. It does not explicitly consider other types of risks, such as market risk or operational risk.
Limited risk differentiation: Basel I applies the same risk weight to all assets within a broad category. For example, all corporate loans are assigned the same risk weight, regardless of the credit quality of the borrower or the specific characteristics of the loan.
National implementation: While Basel I provided a global framework, its implementation and enforcement were the responsibility of individual national regulatory authorities. Each country had the flexibility to adopt the Basel I standards and incorporate them into their own regulatory frameworks.
Basel I played a significant role in establishing a common international approach to bank capital regulation. However, over time, it became apparent that the framework had limitations, particularly in terms of its simplicity and its inability to adequately capture the varying degrees of risk within asset classes. As a result, efforts were made to develop more sophisticated and risk-sensitive frameworks, leading to the introduction of Basel II and subsequently Basel III.
Minimum capital requirements: Basel I sets out a minimum capital requirement for banks based on a percentage of their risk-weighted assets. Under this framework, different types of assets are assigned fixed risk weights to determine the amount of capital banks need to hold against their exposures. For example, corporate loans may have a risk weight of 100%, meaning banks must hold capital equal to at least 8% of the value of those loans.
Simplicity: Basel I was designed to be a simple and standardised framework that could be easily implemented by banks and regulators worldwide. It provided a straightforward method for calculating capital requirements based on broad categories of assets, such as corporate loans, government bonds, and cash.
Credit risk focus: Basel I primarily addresses credit risk, which is the risk of borrowers defaulting on their obligations. It does not explicitly consider other types of risks, such as market risk or operational risk.
Limited risk differentiation: Basel I applies the same risk weight to all assets within a broad category. For example, all corporate loans are assigned the same risk weight, regardless of the credit quality of the borrower or the specific characteristics of the loan.
National implementation: While Basel I provided a global framework, its implementation and enforcement were the responsibility of individual national regulatory authorities. Each country had the flexibility to adopt the Basel I standards and incorporate them into their own regulatory frameworks.
Basel I played a significant role in establishing a common international approach to bank capital regulation. However, over time, it became apparent that the framework had limitations, particularly in terms of its simplicity and its inability to adequately capture the varying degrees of risk within asset classes. As a result, efforts were made to develop more sophisticated and risk-sensitive frameworks, leading to the introduction of Basel II and subsequently Basel III.
