What is Basel I?
Basel I is a set of international banking regulations established by the Basel Committee on Banking Supervision (BCBS). It prescribes a minimum capital requirements for financial institutions, with the aim of minimizing credit risk. Under Basel I, banks that operate internationally were required to maintain at least a minimum amount of capital (8%) based on their risk-weighted assets. Basel I is the first of three sets of regulations known individually as Basel I, II and III, and collectively as Basel Accords.
Key points to remember
- Basel I, the first of the three Basel Accords, created a set of rules that banks must follow to mitigate risk.
- Basel I is now considered too limited in scope, but it set the framework for subsequent Basel Accords.
- With the advent of Basel I, bank assets were classified according to their level of risk, and banks are required to maintain emergency capital according to this classification.
- Under Basel I, banks were required to maintain capital of at least 8% of their determined risk profile.
History of the Basel Committee
The BCBS was founded in 1974 as an international forum where members could cooperate on banking supervision issues. The BCBS says it aims to strengthen “financial stability by improving supervisory know-how and the quality of banking supervision worldwide.” This is done through regulations known as agreements.
Basel I, the committee’s first accord, was released in 1988 and focused on credit risk by creating a classification system for banking assets.
BCBS regulations do not have the force of law. Members are responsible for implementation in their home country. Basel I originally provided for a minimum ratio of capital to risk-weighted assets of 8%, which was to be implemented by the end of 1992. In September 1993, the BCBS announced that G10 countries‘ banks with significant international banking activities complied with the minimum requirements set out in Basel I. According to the BCBS, the minimum capital ratio framework has been adopted not only in its member countries, but in virtually all other countries with banks international active.
Benefits of Basel I
Basel I was developed to mitigate risks for consumers, financial institutions and the economy as a whole. Basel II, introduced a few years later, reduced capital reserve requirements for banks. This has been the subject of some criticism, but as Basel II did not replace Basel I, many banks continued to operate under the original Basel I framework, later supplemented by addendums to Basel III.
Perhaps the greatest legacy of Basel I is that it contributed to the continuous adjustment of banking regulations and best practices, paving the way for new protective measures.
Criticism of Basel I
Basel I has been criticized for hampering banking activity and slowing the growth of the global economy as a whole by making less capital available for lending. Critics on the other side of this argument argue that the Basel I reforms did not go far enough. Both Basel I and Basel II have been accused of failing to avert the financial crisis and Great Recession from 2007 to 2009, events that became a catalyst for Basel III.
Basel I was developed to mitigate risks for consumers, financial institutions and the economy as a whole.
Requirements for Basel I
The Basel I classification system groups banks assets into five risk categories, labeled with the percentages 0%, 10%, 20%, 50% and 100%. A bank’s assets are classified into these categories depending on the nature of the debtor.
The 0% risk category includes cash, central bank and the public debt, and everything Organization for Economic Co-operation and Development (OECD) government debt. Public sector debt can be placed in the 0%, 10%, 20% or 50% category, depending on the debtor.
Development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (less than one year), non-OECD public sector debt and receipts all fall into the 20% category. The 50% category is for residential mortgages, and the 100% category is represented by private sector debt, non-OECD bank debt (maturity greater than one year), immovableplant and equipment, and capital instruments issued by other banks.
The bank must maintain a capital (called Level 1 and Level 2 capital) at least equal to 8% of its risk-weighted assets. This is to ensure that banks hold a sufficient amount of capital to meet their obligations. For example, if a bank has risk-weighted assets of $100 million, it is required to maintain capital of at least $8 million. Tier 1 capital is the most liquid type and represents the bank’s core funding, while Tier 2 capital includes less liquid hybrid capital instruments, loan loss and revaluation reserves, and undisclosed reserves.
What is Basel I?
Basel I is the first of three sets of international banking regulations established by the Basel Committee on Banking Supervision, based in Basel, Switzerland. It has since been supplemented by Basel II and Basel III, the latter being still implemented from 2022.
What is the purpose of Basel I?
The objective of Basel I was to establish an international standard on the amount of capital that banks must keep in reserve to meet their obligations. Its regulations were intended to enhance the security and stability of the global banking system.
How is Basel I different from Basel II and Basel III?
Basel I introduced guidelines on the amount of capital that banks should keep in reserve depending on the risk level of their assets. Basel II refined these guidelines and added new requirements. Basel III further refined the rules based in part on lessons learned from the global financial crisis of 2007 to 2009.
Basel I was the first of the three Basel Accords and introduced capital reserve requirements for banks based on the risk of their assets. It has since been supplemented by Basel II and Basel III.
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