The Basel Accords refer to the banking supervision accords (recommendations on banking regulations) issued by the
Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten (G10) countries in 1974. The committee expanded its membership in 2009 a ...
(BCBS).
Basel I
Basel I is the first Basel Accord. It arose from deliberations by central bankers from major countries during the late 1970s and 1980s. In 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimum ...
was developed through deliberations among
central bankers
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
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
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III.
The Basel II Accord was publ ...
was developed and published in 2004 to supersede the Basel I accords.
Basel III
Basel III is the third Basel Accord, a framework that sets international standards for bank capital adequacy, stress testing, and liquidity requirements. Augmenting and superseding parts of the Basel II standards, it was developed in response to ...
was a set of enhancements to in response to the
financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
. 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
A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system (where banks no ...
.
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 ( ; lb, Lëtzebuerg ; french: link=no, Luxembourg; german: link=no, Luxemburg), officially the Grand Duchy of Luxembourg, ; french: link=no, Grand-Duché de Luxembourg ; german: link=no, Großherzogtum Luxemburg is a small lan ...
and
Spain
, image_flag = Bandera de España.svg
, image_coat = Escudo de España (mazonado).svg
, national_motto = ''Plus ultra'' (Latin)(English: "Further Beyond")
, national_anthem = (English: "Royal March")
, i ...
. Since 2009, all of the other
G-20 major economies
The G20 or Group of Twenty is an intergovernmental forum comprising 19 countries and the European Union (EU). It works to address major issues related to the global economy, such as international financial stability, climate change mitigation ...
are represented, as well as some other major banking locales such as
Hong Kong
Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China ( abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delt ...
and
Singapore
Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, borde ...
.
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
Secretariat may refer to:
* Secretariat (administrative office)
* Secretariat (horse)
Secretariat (March 30, 1970 – October 4, 1989), also known as Big Red, was a champion American thoroughbred racehorse who is the ninth winner of the Ame ...
at the
Bank for International Settlements
The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks".
The BIS carries out its work thr ...
in
Basel
, french: link=no, Bâlois(e), it, Basilese
, neighboring_municipalities= Allschwil (BL), Hégenheim (FR-68), Binningen (BL), Birsfelden (BL), Bottmingen (BL), Huningue (FR-68), Münchenstein (BL), Muttenz (BL), Reinach (BL), Riehen (BS ...
,
Switzerland
). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
and the committee normally meets there. The Basel Accords is a set of recommendations for regulations in the
banking industry {{set category, first= industries (branches of an economy), alternative=industries, topic=Industry (economics)
For other meanings of "industries", see :Industries.
...
.
Basel I: the Basel Capital Accord
Deliberations by
central bankers
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
from major countries resulted in the
Basel Capital Accord, which was published in 1988 and covered capital requirements for
credit risk
A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...
. 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
Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility.
There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most ...
, which included both a standardised approach and a modelled approach, the latter based on
value at risk
Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by ...
.
Basel II: the new capital framework
Published in 2004,
Basel II
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III.
The Basel II Accord was publ ...
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 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
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the Financial crisis of 2007–2008, 2007–2008 global financial crisis. It was triggered by a large decline ...
, 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 financial crisis
Following the
financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
, the
Basel III
Basel III is the third Basel Accord, a framework that sets international standards for bank capital adequacy, stress testing, and liquidity requirements. Augmenting and superseding parts of the Basel II standards, it was developed in response to ...
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 A central clearing counterparty (CCP), also referred to as a central counterparty, is a financial institution that takes on counterparty credit risk between parties to a transaction and provides clearing and settlement services for trades in fore ...
was introduced.
In the following years, the Basel Committee published regulatory standards for the Liquidity Coverage Ratio (LCR) and
Net Stable Funding Ratio
During the financial crisis of 2007–2008, 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 fro ...
(NSFR); and updated the standards for market risk, following a “
Fundamental Review of the Trading Book” (FRTB).
The
Basel III: Finalising post-crisis reforms published by the Basel Committee in 2017, commonly known as Basel 3.1, cover further reforms of the existing framework.
The new standards that come into effect in January 2023, that is, the FRTB and Basel 3.1, are 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.
See also
*
Basel IA
*
Capital Requirements Directive
The Capital Requirements Directives (CRD) for the financial services industry have introduced a supervisory framework in the European Union which reflects the Basel II and Basel III rules on capital measurement and capital standards.
Member St ...
*
Financial Stability Board
The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. It was established after the G20 London summit in April 2009 as a successor to the Financial Stability Forum ...
Notes
References
Further reading
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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