Basel Accord can be explained as a number of regulations laid by the Basel Committee on Bank Supervision (BCBS) to keep a check and balance on their different type of risks like operational, market, and capital. They provide regulations on maintaining regulations to ensure financial stability in case of any unexpected losses.
In 1988 at Basel, Switzerland, central banks around the world published documentation of capital adequacy of banks knows as Basel I. These guidelines were implemented in the year 1992 by law in Group of Ten (G-10) countries. This document divides a financial institute into five subcategories of risks that might be faced in case of an unexpected loss. Although, any international bank is required to maintain a maximum 8% risk weight.
Basel, I have now become outdated in many countries. To replace this, another set of guidelines are being implemented by many countries will be fully put into practice by 2015, known as Basel II. It focuses on three major areas like a minimum capital requirement, market discipline, and supervisory reviews. Its purpose is to create international banking standards to circumvent financial and operational risks.
In the year 1974, after the severe commotion in international currency and financial market Basel Committee was established to regulate and supervise banking practices. Its first meeting took place in 1975. The first Chairman of this committee was Sir George Blunden from 1974 to 1977 (BIS, n.d.).
Initially, the purpose of this committee was to come up with supervisory models, but now their vision has been growing to improve supervision of banking quality worldwide to minimize the unseen risk that a financial institute may encounter. Basel II is the result of modifications made to control the risk at the greater level. In 1975 a document stating called “Concordat” was published by the committee, which took notice of the unpredictable market change and integrated the standard of international banking supervision. It was later amended in May 1983 as a finalized document educating standards for sharing supervisory responsibilities for foreign banking branches, supplementary and joint ventures between host and parent influence and then in April 1990, which paid more attention to improving essential information required by different international supervisors. In June 1992, these guidelines were prepared and published again as Minimum Standards (Huang, Hui. 2006).
This committee provides a platform for different member countries to communicate with each other on their banking supervisory subjects. It strengthens international banking stability in terms of risk. It also standardizes procedures to decreases inequality on the basis of capital prerequisite. It has given a basic definition of the minimum capital requirement to set up minimum risk-based capital sufficiency applicable to international banks (Fadi, Zaher, n.d.).
Basel Accord ensures that no foreign banks neglect reasonable supervision. It builds bridges in international supervisory exposure. It addresses the need to create stability in the international banking system and handle inequalities rising due to differences in nation capital requirement. It is also working in developing more risk-sensitive requirement.
During 1965 and 1981, about eight banking institutions faced failure in United States. The banking industry through out the world was engaged in lending practices and countries external indebtedness was growing at a constant pace. Basel Accord set a limit to minimize these financial risks a bank could incur in relation to credit risk. It has given new definition to banking risk measurements.
Fadi, Zaher. Does The Basel Accord Strengthen Banks?
Huang, Hui. 2006. The Evolution of the Basel Accord: New Issues of Banking Regulation and New Solutions. Global Law Review, (Huanqiu Falu Pinglun), Vol. 28, No. 1, pp. 100-107, 2006.