BASEL

BASEL COMMITTEE ON BANKING SUPERVISION (BCBS):
- The Basel Committee is a committee of bank supervisors drawn from 13 member countries (Belgium, Canada, France, Germany, Italy, Japan, Luxembourg,
- The Netherlands, Spain, Sweden, Switzerland, United Kingdom and United State of America).
- It was founded in 1974 to ensure international cooperation among a number of supervisory authorities.
- It usually meets at the Bank for International settlements in Basel, Switzerland, its permanent Secretariat.
- The Committee framed two Capital Accords, Basel I (1988) and Basel II (1999).
- The differences in these Accords are as follows:
Basel I
Bssel II
Only Credit Risk (Although included capital for market risk subsequently in 1996)
Credit, Market and Operational Risk
Credit Risk: One measure fits all - Broad brush ann roach
Based on Underlying Risk
Single Risk Measure: Minimum Capital Requirement
Package of Minimum Capital Requirement, Supervisory Review Process and Market Discipline working complementary to each other
Basel II
- Base II is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.
- Basel II uses a "three pillars" concept - (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline. The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.
BASEL-III
- BASEL III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed
upon by the members of the Basel Committee on Banking Supervision in 2010-11.
- This, the third of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis.
- Basel III strengthens bank capital requirements and introduces new regulatory requirements on liquidity and bank leverage.
- For instance, the change in the calculation of loan risk in Basel II which some consider a causal factor in the credit bubble prior to the 2007-8 collapse: in Basel II one of the principal factors of financial risk management was out-sourced to companies that were not subject to supervision: credit rating agencies.
- Ratings of creditworthiness and of bonds, financial bundles and various other financial instruments were conducted without supervision by official agencies, leading to AAA ratings on mortgage-backed securities, credit default swaps and other instruments that proved in practice to be extremely bad credit risks.
- In Basel III a more formal scenario analysis is applied (three official scenarios from regulators, with ratings agencies and firms urged to apply more extreme ones).
- The OECDestimates that the implementation of Basel III will decrease annual GDP growth by 0.05 to 0.15 percentage point.
- Outside the banking industry itself, criticism was muted. Bank directors would be required to know market liquidity conditions for major asset holdings, to strengthen accountability for any major losses.