Basel I: The Basel Capital Accord

Basel I

  • Basel I is a set of international banking regulations established by the Basel Committee on Banking Supervision (BCBS).
  • It was first published in 1988 and was designed to improve the capital adequacy of banks.
  • Basel I requires banks to hold a minimum amount of capital, known as Tier 1 capital, equal to 8% of their risk-weighted assets.
  • Risk-weighted assets are assets that are assigned a weighting based on their riskiness.
  • For example, loans to government-backed entities are assigned a weighting of 0%, while loans to corporate borrowers are assigned a weighting of 100%.
  • Basel I also requires banks to hold a minimum amount of Tier 2 capital, which is a less risky form of capital than Tier 1 capital.
  • The amount of Tier 2 capital that banks need to hold depends on their risk profile.

MCQs

  1. What is the purpose of Basel I?
    • To improve the capital adequacy of banks.
  2. What is the minimum amount of capital that banks need to hold under Basel I?
    • 8% of their risk-weighted assets.
  3. What are risk-weighted assets?
    • Assets that are assigned a weighting based on their riskiness.
  4. What is Tier 1 capital?
    • A more risky form of capital that banks need to hold under Basel I.
  5. What is Tier 2 capital?
    • A less risky form of capital that banks need to hold under Basel I.

Answers

  1. To improve the capital adequacy of banks.
  2. 8% of their risk-weighted assets.
  3. Assets that are assigned a weighting based on their riskiness.
  4. A more risky form of capital that banks need to hold under Basel I.
  5. A less risky form of capital that banks need to hold under Basel I.

Criticisms of Basel I

  • Basel I has been criticized for being too simplistic and for not taking into account all of the risks that banks face.
  • For example, Basel I does not take into account the risk of market volatility or the risk of operational failures.
  • As a result, Basel I has been blamed for contributing to the financial crisis of 2008.

Basel II

  • Basel II is a more comprehensive set of banking regulations that was developed in response to the criticisms of Basel I.
  • Basel II was published in 2004 and requires banks to use more sophisticated methods to assess their capital needs.
  • Basel II also introduces new measures to address market risk and operational risk.
  • However, Basel II has been criticized for being too complex and for being difficult to implement.

Basel III

  • Basel III is the latest set of banking regulations that was developed in response to the financial crisis of 2008.
  • Basel III was published in 2010 and introduces a number of new measures to strengthen the resilience of the banking system.
  • These measures include:
    • Higher capital requirements
    • More stringent liquidity requirements
    • New measures to address systemic risk
  • Basel III is still being implemented and is expected to be fully implemented by 2022.