Basel Accords
Save
Basel Accords are a set of global standards that guide the regulation of the banking industry. These accords aim to enhance the safety and soundness of banks and to reduce the risk of financial crises. Basel Accords were developed by the Basel Committee on Banking Supervision, an international body of banking supervisors from various countries.
Basel Accord History
The Basel Accords were first developed in 1988 with the objectives of promoting safety and stability in the international banking system. The need for such regulations emerged during the 1980s, when the failure of several banks highlighted the importance of establishing a consistent and robust framework for banking supervision.
Basel Accord Implementation
Basel Accords are implemented by banks in different countries through their respective national regulatory frameworks. These accords set out minimum capital requirements for banks, which banks must meet to ensure they have sufficient capital to withstand financial shocks and losses. The capital requirements are based on banks' risk profiles, with banks with higher risk profiles required to hold more capital.
The Three Pillars of Basel Accords
Basel Accords consist of three main pillars:
Pillar 1: Minimum Capital Requirements addresses the minimum capital that banks must hold in relation to their risk-weighted assets. This requirement is intended to reduce banks' exposure to credit, market, and operational risks.
Pillar 2: Supervisory Review Process focuses on banks' internal risk management processes. It requires banks to develop their own internal risk management systems and to be subject to regular reviews by regulators. This aims to ensure that banks have a sound framework for identifying, assessing, and managing risks.
Pillar 3: Market Discipline encourages banks to be transparent in disclosing their financial information to investors and other market participants. The aim is to promote market discipline and allow investors to make informed decisions about banks.
