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:
To promote convergence of national capital standards
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.
Any suggestions or correction in this article - please click here