Banking Compliance (BCBS) In Basel, Switzerland

Basel Accord:

The Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks in 1988. The first Basel Accord, also known as Basel I. It centralized almost totally on credit risk. It characterizes capital requirement and structure of risk weights for banks.

The assets of banks and grouped in five categories according to their credit risk, carrying set risk weights of 0%(Cash, Bullion, Home Country Debt Like Treasuries), 10, 20, 50 and 100% and no rating.

Banks that operate in the international platform have a minimum capital requirement equal to 8% of their risk-weighted assets. At least, 4% in Tier I Capital (common stock + disclosed reserves) and more than 8% in Tier I

However, there are problems with definition of Capital and Differential Risk Weights to Assets across the countries. Such as, Basel standards are computed on the basis of book value accounting measures of capital, and not market values. Accounting practices vary considerably across the G-10 countries and often produce results that differ markedly from market assessments.

A problem with the Basel accord was that the risks weights do not take account of risks other than credit risk. Other risks such as market risk, operational risks and liquidity risks that may be important causes of insolvency exposure for banks.

Basel II:

Thus, Basel II was introduced in 2004 with three key pillars, minimum capital requirements, supervisory review process and market discipline, laying down more details for capital adequacy with more precise definitions, risk management and disclosure requirements. Hence it is more risk sensitive and comprehensive.

The first pillar of minimum capital requirements deals with the regulatory capital calculated for credit risk, operational risk and market risk. Credit risk can be calculated in mainly three different ways: standardized approach, internal rating based approach and advanced internal rating based

Basel III:

It is believed that the shortcoming in Basel II is the cause of the global financial disaster in 2008. This is due to Basel II not having any definitive regulation on the debt that banks could admit into their books, and concentrated more on individual financial institutions, while ignoring fundamental risk. To ensure that banks don’t take on unreasonable debt, and that they do not depend on short-term funds too much, Basel III is introduced in 2010.

The guidelines aim to promote a more hardy banking system by fixating on four key banking spectrums, particularly on capital, leverage, funding and liquidity. Requirements for Tier 1 capital and common equity will be 6% and 4.5% respectively. The liquidity coverage ratio will require banks to hold a buffer of high quality liquid assets enough to deal with the cash outflows faced in an intense short-term stress scenario. This is to prevent situations like a bank run. Leverage Ratio more than 3%: The leverage ratio is derived by Tier 1 capital divided by the bank 's average total combined