Basel Accord

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Basel Accord

Agreement concluded among country representatives in 1988 in Switzerland to develop standardized risk-based capital requirements for banks across countries.

Basel Accord

An agreement on international banking regulations dealing with how banks handle risk. The Basel Accord focuses mainly on credit risk; it divides banks' assets into five categories according to how risky they are. The five categories are assets with no risk, 10% risk, 20%, 50% and 100%. All banks conducting international transactions are required under the Basel Accord to hold assets with no more than 8% aggregated risk. The Accord was promulgated in 1988.Banks in most G-10 countries have implemented it since the early 1990s. It is now considered largely outdated and is in the process of being replaced by Basel II. It is also called Basel I.
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Under Basel I, banks were required to hold capital equal to 8% of the balance of all assets.
In the US, only the largest banks will need to adopt Basel II, and the vast majority will be under a modified version of Basel I called Basel IA.
supervisors, Basel I needs to be replaced, at least for the largest, most complex banks, for three major reasons: It has serious shortcomings as it applies to these large entities; the art of risk management has evolved at the largest banks; and the banking system has become increasingly concentrated.
Basel I was a major step forward in capital regulation.
Because, of course, banks retain those assets for which the regulatory capital requirement is less than the market would apply, large banks engaging in capital arbitrage may, as a result, hold too little capital for the assets they retain, even though they meet the letter of the Basel I rules.
For the larger banks, in short, Basel I capital ratios neither reflect risk adequately nor measure bank strength accurately.
Risk measurement and management have improved significantly beyond the state of the art of fifteen years ago, when Basel I was developed.
As proposed, the minimum required capital ratio (8 percent) and the definition of regulatory capital (certain equity, reserves, and subordinated debt) would not change from Basel I.
In contrast to Basel I, which applies the same framework to all covered banks, Basel II, as currently proposed, offers three options for measuring credit risk and three for measuring operational risk.
banks already hold considerable capital in excess of the Basel I regulatory minimum, in part to meet existing U.
Basel is an international committee that was established in 1974 with the goal of improving, and making more consistent, the supervisory guidelines that each country imposes on their banks.
Basel is a city of rich history and impressive architecture.