Basel Accords

The Basel Accords are a series of recommendations on banking regulations issued by the Basel Committee on Banking Supervision (BCBS) to strengthen global banking systems. These Accords are aimed at improving risk management, increasing transparency, and ensuring financial stability across banks. The Basel Accords consist of Basel I, Basel II, and Basel III, which address different aspects of banking risks, capital requirements, and regulatory frameworks.

Key Basel Accords:

  1. Basel I (1988):
  • Developed to set minimum capital requirements for banks to cover credit risk.
  • Enforced by G-10 countries in 1992.
  • Introduced the concept of a minimum capital adequacy ratio (8%), ensuring banks maintain a certain level of capital relative to their risk-weighted assets.
  1. Basel II (2004):
  • Introduced a more complex framework to replace Basel I, focusing on three pillars:
    1. Minimum capital requirements: Expanding risk categories beyond credit risk to include operational risk.
    2. Supervisory review: Enhancing the regulatory oversight of banks’ internal processes.
    3. Market discipline: Requiring banks to disclose relevant information to ensure transparency and sound practices.
  • Criticized for allowing banks to take on too much risk, which contributed to the 2008 subprime mortgage crisis.
  1. Basel III (2010):
  • Introduced in response to the 2007–2008 financial crisis.
  • Focused on improving banks’ resilience through:
    • Higher capital ratios.
    • A leverage ratio requirement to limit the risk of excessive borrowing.
    • Introduction of Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) to improve liquidity management.
  • Further revisions known as Basel 3.1 (published in 2017) aimed to finalize post-crisis reforms, and some components of this framework, like the Fundamental Review of the Trading Book (FRTB), are considered Basel IV by some, though the Basel Committee officially recognizes only three accords.

Basel Committee on Banking Supervision (BCBS):

  • Originally comprised central bankers from G-10 countries, Luxembourg, and Spain. Since 2009, G-20 members and other financial hubs like Hong Kong and Singapore are also represented.
  • The committee’s recommendations are not legally binding but are implemented by member nations through their national laws, often with some variations and delays.
  • The Bank for International Settlements (BIS) in Basel, Switzerland, serves as the secretariat for the BCBS.

The Basel Accords have been instrumental in creating a unified approach to global banking regulation and continue to evolve as new challenges in the financial system arise.