Chapter 28

The Basel Accord*

The Basel Capital Accord, concluded on July 15, 1988, by the Basel Committee on Banking Supervision (BCBS), is the cornerstone for the regulation of commercial banking.1 It instituted for the first time minimum levels of capital to be held by internationally active commercial banks against financial risks.

This Accord, called Basel I, set capital charges against credit risk based on a set of relatively simple rules. To these were added capital adequacy requirements against market risk in 1996.

In June 2004, the Accord underwent a fundamental revision, which created more risk-sensitive capital requirements and added a charge against operational risks. The operational risk charge is explained in Chapter 25. As a result, the new Accord was called Basel II.

The credit crisis that started in 2007 revealed serious weaknesses in the regulatory framework. This led to a new round of revisions, which are informally called Basel III. The BCBS agreed in July 2009 to a major expansion in the capital requirements that was finalized in September 2010.

The Basel Committee formulates broad supervisory standards but its conclusions do not have legal force. Nevertheless, more than 100 countries have adopted the Basel Accord, with varying time lines and applications. For example, U.S. regulators applied Basel II to the largest U.S. banks only. In contrast, the European Union (EU) has incorporated the Basel II rules into EU law through a Capital Adequacy Directive, which ...

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