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Basel I

From Wikipedia, the free encyclopedia

Basel I is the round of deliberations by central bankers from around the world, and in 1988, theBasel Committee (BCBS) in Basel, Switzerland, published a set of minimal capital requirements forbanks. 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 changedas financial conglomerates, financial innovation and risk management have developed. Therefore, amore comprehensive set of guidelines, known as Basel II are in the process of implementation byseveral countries and new updates in response to the financial crisis commonly described as BaselIII.

Contents

1 Background2 Main framework3 See also4 References

Background

The Committee was formed in response to the messy liquidation of a Cologne-based bank (Herstatt)

in 1974. On 26 June 1974, a number of banks had released Deutsche Mark (German Mark) to theBank Herstatt in exchange for dollar payments deliverable in New York. On account of differencesin the time zones, there was a lag in the dollar payment to the counter-party banks, and during thisgap, 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 onBanking Supervision, under the auspices of the Bank of International Settlements (BIS) located inBasel, Switzerland.

Main framework

Basel I, that is, the 1988 Basel Accord, primarily focused on credit risk. Assets of banks wereclassified and grouped in five categories according to credit risk, carrying risk weights of zero (forexample home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (thiscategory has, as an example, most corporate debt). Banks with international presence are required tohold capital equal to 8 % of the risk-weighted assets. However, large banks like JPMorgan Chasefound Basel I's 8% requirement to be unreasonable, and implemented credit default swaps so that inreality they would have to hold capital equivalent to only 1.6% of assets.

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 ofAmerica.

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Most other countries, currently numbering over 100, have also adopted, at least in name, theprinciples prescribed under Basel I. The efficiency with which they are enforced varies, even withinnations of the Group of Ten.

See also

Basel II AccordBasel III

References

The site of the Bank of International Settlements (http://www.bis.org) .Practical articles, on BIS2 and risk modelling, submitted by professionals to help create anindustry standard (http://bis2information.org) .

Retrieved from "http://en.wikipedia.org/wiki/Basel_I"Categories: 1988 in Switzerland | Financial regulation | Bank regulation

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