Basel Accords

Formerly, the Basel Committee consisted of representatives from central banks and regulatory authorities of the Group of Ten countries plus Luxembourg and Spain. Since 2009, all of the other G-20 major economies are represented, as well as some other major banking locales such as Hong Kong and Singapore.[lower-alpha 2]

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 between recommendations 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, Switzerland and the committee normally meets there. The Basel Accords is a set of recommendations for regulations in the banking industry.

The Basel Capital Accord was published in 1988 covering capital requirements for credit risk. The Accord was augmented in 1996 with a framework for market risk, which included both a standardsied approach and a modelled approach, the latter based on value at risk.[1]

Basel II was a new capital framework, which was published in 2004 and intended to supersede the Basel I framework. It introduced "three pillars":[1]

1. Minimum capital requirements, which sought to develop and expand the standardised rules set out in the 1988 Accord;
2. Supervisory review of an institution's capital adequacy and internal assessment process;
3. 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 standards were revised several times including the Basel 2.5 revisions to introduce stressed VaR and IRC for modelled market risk in 2009/10.[1]

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 that started in 2008.

Following the financial crisis of 2007–2008, 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 revised standardised approach to counterparty credit risk (SA-CCR) for exposure to derivative transactions. A specific framework for exposures to central counterparty clearing was introduced.[4]

In the following years, the Basel Committee published regulatory standards for the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR);[5] and updated the standards for market risk, following a “Fundamental Review of the Trading Book”.[6] The Basel III: Finalising post-crisis reform standards published by the Basel Committee in 2017, commonly known as Basel 3.1, cover further reforms of the existing framework.[2]

• Basel IA
• Capital Requirements Directive
• Financial Stability Board

• Deventer, Donald R. Van; Mesler, Mark (2003). Credit Risk Models and the Basel Accords. Wiley. ISBN 978-0-470-82091-9.
• Elbannan, Mona (2011). Basel Accords Consequences. Lap Lambert Academic Publishing GmbH KG. ISBN 978-3-8443-8363-8.
• Eubanks, Walter W.; Division, Government and Finance (2006). The Basel Accords: The Implementation of II and the Modification of I. Congressional Research Service, the Library of Congress.
• Han, Yicheng (2020). Historical Capital Regulation of Banks. Standards and Influence of Basel Accords. GRIN Verlag. ISBN 978-3-346-30865-8.
• Liew, Venus Khim-Sen; Rahim, Rossazana Ab; Riaz, Samina (2019). Basel Accords, Bank Capital and Portfolio Risk Behavior. Cambridge Scholars Publishing. ISBN 978-1-5275-3889-4.
• Quillin, Bryce (2008). International Financial Co-Operation: Political Economics of Compliance with the 1988 Basel Accord. Routledge. ISBN 978-1-135-97959-1.

• "Basel Accord - an overview ScienceDirect Topics". www.sciencedirect.com.