Glossary term
Basel Accords
Subject: Risk Management, Prudential and Capital Risk
Also known as: Basel Framework, Basel Capital Accords
The Basel Accords are international standards for bank regulation from the Basel Committee on Banking Supervision, a group of central banks and supervisors. They set minimum rules on capital, liquidity and risk management, and countries adopt them into their own law.
Explanation
The Committee meets under the Bank for International Settlements in Basel and has no power to make binding law. Its standards take effect when national authorities apply them to their banks. Basel I, in 1988, set a simple minimum capital ratio against credit risk. Basel II, in the mid-2000s, added risk-sensitive models, supervisory review and market disclosure, and brought in a charge for operational risk. After the 2008 crisis, Basel III raised the quality and amount of capital, added a simple capital-to-exposure ratio, buffers and two liquidity standards. Final changes to Basel III were agreed in 2017, and countries have set their own timetables for phasing them in. The aim is a level playing field and a safer banking system. A bank in almost any major jurisdiction will find Basel terms in its national rulebook, its reporting templates and its supervisor's questions.
Example
A national regulator decides to apply the latest Basel standard. It publishes draft rules, consults banks, then issues a rule that sets the required capital ratio, the buffers and the date by which banks must comply. A bank in that country then changes its reporting systems and capital plan so that it can show compliance at the first deadline.
Not to be confused with
- Basel III
- Basel III is the latest major standard. The Basel Accords cover the whole series, from the first in 1988 onward.