Banking Norms of Basel Committee – Basel I, II, III – Explained.

Basel I

Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, 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.

Basel I was formed in response to the messy liquidation of Cologne-based Herstatt Bank in 1973. On 26 June 1974, a number of banks had released Deutschmarks (the German currency) to the Herstatt Bank in exchange for dollar payments deliverable in New York. Due to differences in the time zones, there was a lag in the dollar payment to the counterparty banks; during this lag period, before the dollar payments could be affected in New York, the Herstatt Bank was liquidated by German regulators.

Basel I, that is, 1988, Basel Accord, is primarily focused on credit risk and appropriate risk-weighting of assets. Banks with an international presence are required to hold capital equal to 8% of their risk-weighted assets (RWA).

Read Also: Basel II and Basel III Framework

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.

Basel II, initially published in June 2004, was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks face. One focus was to maintain sufficient consistency of regulations so that this does not become a source of competitive inequality amongst internationally active banks.

Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices.

Basel II uses a “three pillars” concept – minimum capital requirements (addressing risk), supervisory review and market discipline.

Must Read: Commercial banks & Scheduled and Non-Scheduled

Basel III

Basel III is a global, voluntary regulatory standard on bank capital adequacy, stress testing, and market liquidity risk by the Basel Committee on Banking Supervision. The third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Basel III was supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

Basel III is primarily related to the risks for the banks of a run on the bank by requiring differing levels of reserves for different forms of bank deposits and other borrowings.

From 1988 this framework was progressively introduced in member countries of G-10, comprising 13 countries as of 2013: Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United States of America.

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