HOME

TheInfoList



OR:

The Basel Accords refer to the banking supervision accords (recommendations on banking regulations) issued by the Basel Committee on Banking Supervision (BCBS). Basel I was developed through deliberations among central bankers from major countries. In 1988, the Basel Committee published a set of minimum capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992. A new set of rules known as Basel II was developed and published in 2004 to supersede the Basel I accords. Basel III was a set of enhancements to in response to the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
. It does not supersede either Basel I or II but focuses on reforms to the Basel II framework to address specific issues, including related to the risk of a bank run. The Basel Accords have been integrated into the consolidated Basel Framework, which comprises all of the current and forthcoming standards of the Basel Committee on Banking Supervision.


The Basel Committee on Banking Supervision

Formerly, the Basel Committee consisted of representatives from central banks and regulatory authorities of the Group of Ten countries plus
Luxembourg Luxembourg, officially the Grand Duchy of Luxembourg, is a landlocked country in Western Europe. It is bordered by Belgium to the west and north, Germany to the east, and France on the south. Its capital and most populous city, Luxembour ...
and
Spain Spain, or the Kingdom of Spain, is a country in Southern Europe, Southern and Western Europe with territories in North Africa. Featuring the Punta de Tarifa, southernmost point of continental Europe, it is the largest country in Southern Eur ...
. Since 2009, all of the other G-20 major economies are represented, as well as some other major banking locales such as
Hong Kong Hong Kong)., Legally Hong Kong, China in international treaties and organizations. is a special administrative region of China. With 7.5 million residents in a territory, Hong Kong is the fourth most densely populated region in the wor ...
and
Singapore Singapore, officially the Republic of Singapore, is an island country and city-state in Southeast Asia. The country's territory comprises one main island, 63 satellite islands and islets, and one outlying islet. It is about one degree ...
. The Committee does not have the authority to enforce recommendations, although most member countries as well as some other countries tend to implement the Committee's policies. This means that recommendations are enforced through national (or EU-wide) laws and regulations, rather than as a result of the committee's recommendations - thus some time may pass and, potentially, some unilateral changes may be made, between the international recommendations for minimum standards being agreed and implementation as law at the national level. The regulatory standards published by the committee are commonly known as ''Basel Accords.''They are called the Basel Accords as the BCBS maintains its secretariat at the Bank for International Settlements in
Basel Basel ( ; ), also known as Basle ( ), ; ; ; . is a city in northwestern Switzerland on the river Rhine (at the transition from the High Rhine, High to the Upper Rhine). Basel is Switzerland's List of cities in Switzerland, third-most-populo ...
,
Switzerland Switzerland, officially the Swiss Confederation, is a landlocked country located in west-central Europe. It is bordered by Italy to the south, France to the west, Germany to the north, and Austria and Liechtenstein to the east. Switzerland ...
and the committee normally meets there. The Basel Accords is a set of recommendations for regulations in the banking industry.


Basel I: the Basel Capital Accord

Deliberations by central bankers from major countries resulted in the Basel Capital Accord, which was published in 1988 and covered capital requirements for credit risk. The Accord was enforced by law in the Group of Ten (G-10) countries in 1992. The Basel Accord was augmented in 1996 with a framework for market risk, which included both a standardised approach and a modelled approach, the latter based on value at risk.


Basel II: the new capital framework

Published in 2004, Basel II was a new capital framework to supersede the Basel I framework. It introduced "three pillars": # Minimum capital requirements, which sought to develop and expand the standardised rules set out in the 1988 Accord; # Supervisory review of an institution's capital adequacy and internal assessment process; # Effective use of disclosure as a lever to strengthen market discipline and encourage sound banking practices. Capital requirements for operational risk were introduced for the first time. The ratio of equity and credit is 8% under Basel II. The standards were revised several times during subsequent years. Bank regulators in the United States took the position of requiring a bank to follow the set of rules (Basel I or Basel II) giving the more conservative approach for the bank. Because of this it was anticipated that only the few very largest US banks would operate under the Basel II rules, the others being regulated under the Basel I framework. However Basel II standards were criticised by some for allowing banks to take on too much risk with too little capital. This was considered part of the cause of the US subprime mortgage crisis, which started in 2008. The Basel 2.5 revisions introduced stressed VaR and IRC for modelled market risk in 2009-10.


Basel III: responding to the 2008 financial crisis

Following the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
, the Basel III reforms were published in 2010/11. The standards set new definitions of capital, higher capital ratio requirements, and a leverage ratio requirement as a "back stop" measure. Risk-based capital requirements (RWAs) for CVA risk and interest rate risk in the banking book were introduced for the first time, along with a large exposures framework, a revised securitisation framework, and a standardised approach to counterparty credit risk (SA-CCR) to measure exposure to derivative transactions. A specific framework for exposures to central counterparty clearing was introduced. The BCBS also published regulatory standards for the Liquidity Coverage Ratio (LCR) and
Net Stable Funding Ratio During the 2008 financial crisis, several banks, including the UK's Northern Rock and the U.S. investment banks Bear Stearns and Lehman Brothers, suffered a liquidity crisis, due to their over-reliance on short-term wholesale funding from the int ...
(NSFR); In subsequent years, the Basel Committee updated the standards for market risk, based on a “ Fundamental Review of the Trading Book” (FRTB). In addition, further reforms of the framework were published by the Basel Committee in 2017 under the title Basel III: Finalising post-crisis reforms. These reforms were sometimes referred to as "Basel IV". However, the secretary general of the Basel Committee said, in a 2016 speech, that he did not believe the changes are substantial enough to warrant that title and the Basel Committee refer to only three Basel Accords. These new standards came into effect on 1 January 2023, although national implementation of the standards is generally running behind this schedule and still ongoing.


Criticism

The framework's approach to risk which is based on risk weights derived from the past was criticised for failing to account for the uncertainty in the future. A recent
OECD The Organisation for Economic Co-operation and Development (OECD; , OCDE) is an international organization, intergovernmental organization with 38 member countries, founded in 1961 to stimulate economic progress and international trade, wor ...
study suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced adverse systemic shocks that materialised during the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
. According to the study, capital regulation based on risk-weighted assets encourages innovation designed to circumvent regulatory requirements and shifts banks' focus away from their core economic functions. Tighter capital requirements based on risk-weighted assets, introduced in the Basel III, may further contribute to these skewed incentives. New liquidity regulation, notwithstanding its good intentions, is another likely candidate to increase bank incentives to exploit regulation. In an October 24, 2020 speech at the Bund Financial Summit in Shanghai, Jack Ma described the Basel Accords as a "club for the elderly."


See also

* Basel IA * Capital Requirements Directive * Financial Stability Board


Notes


References


Further reading

* * * * * *


External links

* {{Cite web , title=Basel Accord - an overview ScienceDirect Topics , url=https://www.sciencedirect.com/topics/economics-econometrics-and-finance/basel-accord , website=www.sciencedirect.com Financial regulation Basel II Bank for International Settlements