Financial Risk Management

CHAPTER 1A Brief History of the Basel Framework

Since its creation, the Basel Committee has set up international standards for bank regulations, specifically its three landmark updates which are commonly known as Basel I, Basel II and, more recently, Basel III, among multiple revisions.¹ The core idea behind this set of accords on capital adequacy requirements is to determine whether a bank possesses adequate reserves to deal with unexpected losses. In short, the Basel accords aim to provide a buffer against bank losses, protect creditors in the event of bank collapses and create disincentive for excessive risk‐taking. The main milestones of banking supervision from 1988 to 2021 are displayed in Figure 2.

• July 1988. Publication of International convergence of capital measurement and capital standards (BCBS, 1988), commonly known as “The Basel Capital Accord” or Basel I. The standards in this document are mainly directed towards assessing capital in relation to credit risk (the risk of counterparty failure), the main risk incurred by most banks.
• January 1996. Publication of Amendment to the capital accord to incorporate market risks (BCBS, 1996). Banks will be required to measure and apply capital charges in respect to their market risks in addition to their credit risks.
• June 2004. Release of a revised capital framework generally known as Basel II. According to the Basel Committee: “The new framework was designed to improve the way regulatory capital requirements reflect ...