Learn about the Basel regulations: I, II and III


Since 1988, the Basel Committee on Banking Supervision has issued three treaties. These provide financial institutions for possible risks. 

In 1974, the financial system turned upside down thanks to the sum of various factors, including the collapse of Bretton Woods in 1971, the stock market crash in 1973, and the oil price shock in 1973. 74.

This scenario forced countries to find a quick solution to market disturbances. This was given the name of the Basel Committee on Banking Supervision (CSBB). 

The CSBB was established by the G-10 central bank governors in 74 (Belgium, Canada, France, Italy, Japan, the Netherlands, the United Kingdom, the United States, Germany, and Sweden).

The main objective was to coordinate to exchange financial information and ensure that the banks had sufficient capital. In this way, they would meet their current and expected liabilities; in addition to improving understanding of key supervisory issues and improving banking quality worldwide.

These countries continue to represent the Committee, in addition to two other nations that are not members of the G-10: Luxembourg and Spain, which joined the committee in 2001.

Nowadays, the Committee is made up of members from 27 countries around the world, which are represented by their central banks and financial regulators. Among these countries is Mexico. The committee meetings are held four times a year and normally take place at the Bank for International Settlements in Basel, Switzerland.

The treaties that the Commission has issued so far are 3: Basel I, Basel II and Basel III.

Basel I

The first treaty of the Committee was created in 1988. In it, a minimum of 8% of resources was established for financial entities so that they would no longer have more risks when extending credits.

Basel II

Subsequently, in 2004, a New Capital Agreement was created. In it, the necessity of a bank’s concern about its solvency and discipline in the market was detailed, for which reason they were recommended to be completely transparent when reporting risks of its operations. Its objective was to create standards and regulations on how much capital banks should have.

Basel II has three pillars:

  1. Companies must calculate the minimum regulatory capital for credit, market and operational risk. Here, the minimum 8 percent of the total capital ratio already imposed in Basel I is still maintained.
  2. Banks must carry out an Internal Capital Adequacy Assessment Process (ICAAP) that analyzes all the risks to which each financial institution is exposed. Likewise, banks must disclose information about their capital and their risk management.
  3. Banks should have a set of disclosure requirements that aim to improve the participants’ ability to assess their risk management and capital structures. This transparency is to incentivize banks and financial institutions to create robust risk management frameworks.

Basel III 

It was published in 2010 and it reinforced the supervision and systematic risk control by preserving reserves for both recessions and economic expansions. This regulation was formed as a result of the financial crisis of 2007-2009.

Basel III highlights the need for banks to have a capital conservation cushion (made up of ordinary capital worth 2.5% of risk-weighted assets) with the aim of increasing it in times of economic growth in order to make use of him in case of losses. There is also talk about a capital countercyclical buffer of between 0% and 2.5%, which talks about saving capital in cases of excessive credit growth to avoid the formation of “bubbles”.

The regulation also includes the Liquidity Coverage Ratio (LCR), which requires banks to maintain sufficient high-quality liquid assets to withstand 30 days in a stress funding scenario.

Until now, the Committee does not formally have a supervisory authority at the supranational level, so its guidelines and regulations do not have legal force; however, they are recommendations that its members put into practice in their national scope in order to create an international financial balance.

Keep learning with PR1ME Capital

Previously we discovered the origin, evaluation procedures and competitive differences  of the Risk Rating Agencies  and we understood that for companies, having a good rating is vital in order to find new investors who want to give a part of their capital to the development of the organization. 

With the necessary information, the agencies carry out an exhaustive analysis of the  key factors for the rating , such as financial reports, information from the private and public sector and the company’s performance over long periods. 

Now we know that there are  more than a hundred other rating agencies at the international level  , 118 of which are currently active; of these, only nine are approved and recognized by the US Securities and Exchange Commission.

Just as we addressed in the first chapter the controversies with the  credit agencies  and we saw how their reputation is affected by various factors and we delved into other factors that have been continuously criticized .

What will we talk about next time? Follow us on our social networks to continue learning with  PR1ME Capital  and don’t miss our next content.

Fuente: Bank for International Settlements,
Economipedia, BBVA


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