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 It is now considered largely outdated and is in the process of being replaced by Basel II.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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International standards for banking capital requirements are developed by the Basel Committee on Banking Supervision (BCBS) and are known as the Basel Capital Accords. Although the Reserve Bank is not a member of the BCBS, it has adopted the main elements of the Basel Capital Accords.
Basel III strengthens the minimum standards for the quality and quantity of banks' capital, and aims to reduce bank leverage and improve the risk coverage of the Basel Capital Accords. One of the purposes of Basel III is to make it more likely that banks have sufficient capital to absorb the losses they might incur, thus reducing the likelihood that a bank will fail, or that a government will be called on to use taxpayer funds to bail out a bank.
The Basel Capital Accords require a bank to maintain a minimum amount of capital in relation to its risk-weighted exposures (box 2).
In the wake of the Global Financial Crisis (GFC) it became apparent that there were some shortcomings in the Basel Capital Accord in place at the time, known as Basel II.
They can be drafted as broad principles (such as the BCBS Core principles for banking supervision and the IOSCO Objectives and Principles for securities supervision, both among the twelve key standards of the Compendium; but also the FSB Principles for sound compensation practices), or more specific rules (Basel Capital accords on capital requirements are a case in point).
A good starting point for their examination is the FSB Compendium of financial standards, even though the effectiveness of global regulation is strictly linked with the implementation of more specific rules, such as the Basel capital accord, the IOSCO Code of conduct for Credit rating agencies and the FSB recommendations about derivatives and systemically important financial institutions (SIFI).
This model of implementation was used already with the Basel capital accord of 1988 (89), and is still used for most BCBS' and IOSCO's standards.
Contents Overview of Capital Adequacy Regulation The Basel Capital Accords Enhanced Safety and Soundness Requirements Under Dodd-Frank Removal of References to Credit Ratings Section 171: The Collins Amendment U.S.
The safety and soundness regulatory framework for banking institutions that stems from the Basel Capital Accords include
The work by the Basel Committee on Banking Supervision (BCBS) on the first Basel Capital Accord, (8) Basel I, provided an international consensus framework for bank safety and soundness regulation.
(12) See Secretariat of the Basel Committee on Banking Supervision, The New Basel Capital Accord: An Explanatory Note, Bank for International Settlements, Basel, Switzerland, January 2001, http://www.bis.org/publ/bcbsca01.pdf.
The FSI asked for the seminar in support of the new Basel Capital Accords, which will require additional capital requirements for loans primarily secured by real estate.