Basel Accords

  • The Basel Accords (i.e., Basel I, II and now III) are a set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk.
  • The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
  • The objectives of the accords could be summed up as:
  1. To strengthen the international banking system
  2. To promote convergence of national capital standards
  3. To iron out competitive inequalities among banks across countries of the world
  • The first Basel Accord, known as Basel I (introduced in 1988) focused only on the capital adequacy of financial institutions. Banks that operate internationally were required to have a risk weight of 8 per cent or less. India adopted Basel I norms in 1999.
  • The second Basel Accord, known as Basel II (published in 2004) focused on 3 main areas, including minimum capital requirements, supervisory review and market discipline. Thus Basel II focused on macro-prudential regulation.
  • The third Basel Accord, known as Basel III (announced in 2010) is a comprehensive set of reform measures aimed to strengthen the regulation, supervision and risk management of the banking sector.
  • The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.
  • Basel III norms are based on renewed focus of central bankers on ‘macro-prudential stability’ i.e. global regulators are focusing on financial stability of system as a whole rather than micro regulation of any individual bank.
  • The 2017 Basel III reforms complement the initial phase of the Basel III reforms announced in 2010.
  • The 2017 reforms seek to restore credibility in the calculation of risk weighted assets (RWAs) and improve the comparability of banks’ capital ratios.

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