Introduction to Basel Capital Accord

What is the Basel Committee for Banking Supervision?

The Basel Committee on Banking Supervision is a committee of banking supervisory authorities, which was established by the central bank governors of the Group of Ten (G10) countries in 1975. It consists of senior representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States.

The committee is one of several committees set up under the auspices of the Bank for International Settlements (BIS). The Basel Committee meets regularly four times a year. It has about thirty technical working groups and task forces, which also meet regularly. The ten countries are each represented by their central bank and also by the authority with formal responsibility for the prudential supervision of banking business where this is not the central bank.

The Committee does not possess any formal supranational supervisory authority, and its conclusions do not have legal force. Rather, it formulates broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements that are best suited to their own national systems.

What is the Basel Capital Accord?

Published by the Basel Committee on Banking Supervision in 1988, the Basel Capital Accord sets down the agreement among the G10 central banks to apply common minimum capital standards to their banking industries, to be achieved by end-year 1992. The objective was to introduce international convergence of capital measurement and capital standards. The standards are almost entirely addressed to credit risk, the main risk incurred by banks (The new capital accord includes credit, market, as well as operational risk).

In recent years, the Basel Accord has gone through various amendments. The original accord published in 1988 is commonly known as Basel I, and the new capital accord published in 2004 is commonly known as Basel II.

In the coming posts we will provide an overview of Basel I, and it’s shortcomings. We will then discuss in details the various provisions of Basel II.