Understanding Systemic Risk in Global Financial Markets

CHAPTER 13The Basel Accords

INTRODUCTION

The Basel Accords are multinational accords that set minimum capital requirements for banks. The Basel Accords were established by the BIS's Basel Committee on Banking Supervision in order to strengthen the soundness and stability of the international banking system. In this chapter we explore the Basel Accords, including Basel I, II, and III.

After you read this chapter you will be able to:

• Describe the Basel Accords' approach.
• Explain the importance of capital.
• Understand credit risk, market risk, operational risk, and liquidity risk.
• Describe Basel I, II, and III.

WHAT ARE THE BASEL ACCORDS?

The Basel Accords are multinational accords that set minimum capital requirements for banks. The Basel Accords were established by the BIS's Basel Committee on Banking Supervision, otherwise known as the “Basel Committee.”¹

The Basel Accords have evolved over time.² Basel I, the first of the Basel Accords, set the original minimum capital adequacy ratio requirements. Basel I was published in 1988 and implemented by the end of 1992. Basel I was amended several times. Basel II, which was proposed in 1999 and published in June 2004, revised Basel I's capital framework. Basel III, which was published in 2011, set additional revisions to the capital framework, which were agreed to following the financial crisis. Basel III's revisions to the capital framework added additional capital buffers, standards in relation to liquidity, and other new requirements. ...