Basel Committee and Basel accords 1,2 and 3

Banking Awareness Study Material

Basel Committee and Basel accords 1,2 and 3

The Bank for International Settlements (BIS), appointed a Basel Committee on Banking Supervision in 1988. Basel committee appointed by BIS formulated rules and regulation for effective supervision of the Central Banks. The committee also prescribed certain norms for the Central Banks to follow.

Basel Accords

Basel Accord is a set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk. The aim of making these accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

Basel 1

The first Basel accord was issued in the year 1988. It focused on the capital adequacy of financial institutions. The capital adequacy risk categorizes the assets of financial institutions into five risk categories (0%, 10%, 20%, 50%, 100%). Banks that operate internationally are required to have a risk weight of 8% or less.

Basel 2

Basel 2 is the second of the Basel accords. The purpose of Basel 2 is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. The second Basel accord is to be fully implemented by 2015. It focuses on three main areas, including minimum capital requirements, supervisory review and market discipline which are known as three pillars. The aim of this accord is to strengthen international banking requirements as well as to supervise and enforce these requirements.

Basel 3

Basel 3 is part of the continuous effort made by the Basel Committee on Banking Supervision to enhance the banking regulatory framework. It builds on the Basel 1 and 2 documents and seeks to improve the banking sector’s ability to deal with financial and economic stress, improve risk management and strengthen the banks’ transparency. The third of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the Global Financial Crisis. The focus of Basel 3 is to foster greater resilience at the individual bank level in order to reduce the risk of system wide shocks.