Basel I
Encyclopedia
Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee
(BCBS) in Basel
, Switzerland
, published a set of minimal capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992 . Basel I is now widely viewed as outmoded. Indeed, the world has changed as financial conglomerates, financial innovation and risk management have developed. Therefore, a more comprehensive set of guidelines, known as Basel II
are in the process of implementation by several countries and new updates in response to the financial crisis commonly described as Basel III
.
-based bank (Herstatt Bank
) in 1974.
On 26 June 1974, a number of banks had released Deutsche Mark (German Mark)
to the Bank Herstatt
in exchange for dollar payments deliverable in New York
. On account of differences in the time zone
s, there was a lag in the dollar payment to the counter-party banks, and during this gap, and before the dollar payments could be effected in New York, the Bank Herstatt was liquidated by German regulators.
This incident prompted the G-10 nations to form towards the end of 1974, the Basel Committee on Banking Supervision, under the auspices of the Bank of International Settlements (BIS) located in Basel
, Switzerland
.
. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Banks with international presence are required to hold capital equal to 8 % of the risk-weighted assets. The creation of the credit default swap
after the Exxon
Valdez
incident helped large banks hedge lending risk and allowed banks to lower their own risk to lessen the burden of these onerous restrictions.
Since 1988, this framework has been progressively introduced in member countries of G-10, currently comprising 13 countries, namely, Belgium
, Canada
, France
, Germany
, Italy
, Japan
, Luxembourg
, Netherlands
, Spain
, Sweden
, Switzerland
, United Kingdom
and the United States of America.
Most other countries, currently numbering over 100, have also adopted, at least in name, the principles prescribed under Basel I. The efficiency with which they are enforced varies, even within nations of the Group of Ten.
Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1975. It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance...
(BCBS) in Basel
Basel
Basel or Basle In the national languages of Switzerland the city is also known as Bâle , Basilea and Basilea is Switzerland's third most populous city with about 166,000 inhabitants. Located where the Swiss, French and German borders meet, Basel also has suburbs in France and Germany...
, Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
, published a set of minimal capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992 . Basel I is now widely viewed as outmoded. Indeed, the world has changed as financial conglomerates, financial innovation and risk management have developed. Therefore, a more comprehensive set of guidelines, known as Basel II
Basel II
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision...
are in the process of implementation by several countries and new updates in response to the financial crisis commonly described as Basel III
Basel III
BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed upon by the members of the Basel Committee on Banking Supervision. The third of the Basel Accords was developed in a response to the deficiencies in financial regulation revealed by the global financial...
.
Background
The Committee was formed in response to the messy liquidation of a CologneCologne
Cologne is Germany's fourth-largest city , and is the largest city both in the Germany Federal State of North Rhine-Westphalia and within the Rhine-Ruhr Metropolitan Area, one of the major European metropolitan areas with more than ten million inhabitants.Cologne is located on both sides of the...
-based bank (Herstatt Bank
Herstatt Bank
Herstatt Bank was a privately-owned bank in the German city of Cologne. It went bankrupt on 26 June 1974 in a famous incident illustrating settlement risk in international finance....
) in 1974.
On 26 June 1974, a number of banks had released Deutsche Mark (German Mark)
German mark
The Deutsche Mark |mark]], abbreviated "DM") was the official currency of West Germany and Germany until the adoption of the euro in 2002. It is commonly called the "Deutschmark" in English but not in German. Germans often say "Mark" or "D-Mark"...
to the Bank Herstatt
Herstatt Bank
Herstatt Bank was a privately-owned bank in the German city of Cologne. It went bankrupt on 26 June 1974 in a famous incident illustrating settlement risk in international finance....
in exchange for dollar payments deliverable in New York
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
. On account of differences in the time zone
Time zone
A time zone is a region on Earth that has a uniform standard time for legal, commercial, and social purposes. In order for the same clock time to always correspond to the same portion of the day as the Earth rotates , different places on the Earth need to have different clock times...
s, there was a lag in the dollar payment to the counter-party banks, and during this gap, and before the dollar payments could be effected in New York, the Bank Herstatt was liquidated by German regulators.
This incident prompted the G-10 nations to form towards the end of 1974, the Basel Committee on Banking Supervision, under the auspices of the Bank of International Settlements (BIS) located in Basel
Basel
Basel or Basle In the national languages of Switzerland the city is also known as Bâle , Basilea and Basilea is Switzerland's third most populous city with about 166,000 inhabitants. Located where the Swiss, French and German borders meet, Basel also has suburbs in France and Germany...
, Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
.
Main framework
Basel I, that is, the 1988 Basel Accord, primarily focused on credit riskCredit risk
Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....
. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Banks with international presence are required to hold capital equal to 8 % of the risk-weighted assets. The creation of the credit default swap
Credit default swap
A credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...
after the Exxon
Exxon
Exxon is a chain of gas stations as well as a brand of motor fuel and related products by ExxonMobil. From 1972 to 1999, Exxon was the corporate name of the company previously known as Standard Oil Company of New Jersey or Jersey Standard....
Valdez
Valdez
Valdés is a surname of Asturian origin.Both in North and South America the spelling Valdez is very common.The exact meaning of "Valdés" is not clear...
incident helped large banks hedge lending risk and allowed banks to lower their own risk to lessen the burden of these onerous restrictions.
Since 1988, this framework has been progressively introduced in member countries of G-10, currently comprising 13 countries, namely, Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
, Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
, Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
, Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
, Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
, Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
, Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
, United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
and the United States of America.
Most other countries, currently numbering over 100, have also adopted, at least in name, the principles prescribed under Basel I. The efficiency with which they are enforced varies, even within nations of the Group of Ten.