| Basel Framework International regulatory standards for banks |
|---|
| Background |
| Pillar 1: Regulatory capital |
| Pillar 2: Supervisory review |
| Pillar 3: Market disclosure |
| Business and Economics Portal |
Basel I is the firstBasel Accord. It arose from deliberations bycentral bankers from major countries during the late 1970s and 1980s. In 1988, theBasel Committee on Banking Supervision (BCBS) inBasel, Switzerland, published a set of minimum capital requirements for banks. It is also known as the 1988 Basel Accord, and was enforced by law in theGroup of Ten (G-10) countries in 1992.
The Committee was formed in response to the messy liquidation ofCologne-basedHerstatt Bank in 1974.On 26 June 1974 a number of banks had releasedDeutschmarks (the German currency) to theHerstatt Bank in exchange fordollar payments deliverable inNew York City. Due to differences in thetime zones, there was a lag in the dollar payment to thecounterparty banks; during this lag period, before the dollar payments could be effected in New York, the Herstatt Bank was liquidated by German regulators.
This incident prompted the G-10 nations to form theBasel Committee on Banking Supervision in late 1974, under the auspices of theBank for International Settlements (BIS) located inBasel, Switzerland.
Basel I, that is, the 1988 Basel Accord, is primarily focused oncredit risk and appropriaterisk-weighting of assets. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of 0% (for example cash,bullion, home country debt like Treasuries), 20% (securitisations such asmortgage-backed securities (MBS) with the highest AAArating), 50% (municipal revenue bonds, residential mortgages), 100% (for example, most corporate debt), and some assets given no rating. Banks with an international presence are required to hold capital equal to 8% of their risk-weighted assets (RWA).
The tier 1 capital ratio = tier 1 capital / all RWA
The total capital ratio = (tier 1 + tier 2 capital) / all RWA
Leverage ratio = total capital/average total assets
Banks are also required to reportoff-balance-sheet items such as letters of credit, unused commitments, and derivatives. These all factor into the risk weighted assets, which are reported to regulators. In the United States, the report is typically submitted to theFederal Reserve Bank as HC-R for the bank-holding company and submitted to theOffice of the Comptroller of the Currency (OCC) as RC-R for just the bank.
From 1988 this framework was progressively introduced in member countries of G-10, comprising 13 countries as of 2013[update]:Belgium,Canada,France,Germany,Italy,Japan,Luxembourg,Netherlands,Spain,Sweden,Switzerland,United Kingdom and theUnited States.
Over 100 other countries also adopted, at least in name, the principles prescribed under Basel I. The efficacy with which the principles are enforced varies, even within nations of the Group.
Basel I incentivized global banks to lend to members of the OECD and the IMF'sGeneral Arrangements to Borrow (GAB) while disincentivizing loans to non-members of these institutions.[1]
