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DONE - Crisis & Risk Mgt Bassel

DONE - Crisis & Risk Mgt Bassel

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Published by icarol89
Bassel assignment
Bassel assignment

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Published by: icarol89 on Mar 23, 2010
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1.
What is Basel I ? Explain !a.Basel I is the round of deliberations by central bankersfrom around the world, and in 1988, the Basel Committee(BCBS) in Basel, Switzerland, published a set of minimalcapital requirements for banks. This is also known as the1988 Basel Accord, and was enforced by law in the Groupof Ten (G-10) countries in 1992 . Basel I is now widelyviewed as outmoded, and a more comprehensive set of guidelines, known as Basel II are in the process of implementation by several countries.b.Background
i.
 The Committee was formed in response to the messyliquidation of a Cologne-based bank (Herstatt) in1974. On 26 June 1974, a number of banks hadreleased Deutsche Mark (German Mark) to the BankHerstatt in exchange for dollar payments deliverablein New York. On account of differences in the timezones, there was a lag in the dollar payment to thecounter-party banks, and during this gap, and beforethe dollar payments could be effected in New York,the Bank Herstatt was liquidated by Germanregulators. This incident prompted the G-10 nationsto form towards the end of 1974, the BaselCommittee on Banking Supervision, under theauspices of the Bank of International Settlements(BIS) located in Basel, Switzerland.c.Main frameworki.Basel I, that is, the 1988 Basel Accord, primarilyfocused on credit risk. Assets of banks were classified
 
and grouped in five categories according to creditrisk, carrying risk weights of zero (for example homecountry sovereign debt), ten, twenty, fifty, and up toone hundred percent (this category has, as anexample, most corporate debt). Banks withinternational presence are required to hold capitalequal to 8 % of the risk-weighted assets.ii.Since 1988, this framework has been progressivelyintroduced in member countries of G-10, currentlycomprising 13 countries, namely, Belgium, Canada,France, Germany, Italy, Japan, Luxembourg,Netherlands, Spain, Sweden, Switzerland, UnitedKingdom and the United States of America.iii.Most other countries, currently numbering over 100,have also adopted, at least in name, the principlesprescribed under Basel I. The efficiency with whichthey are enforced varies, even within nations of theGroup of Ten.
2.
What is Basel II ? Explain !a.Basel II is the second of the Basel Accords, which arerecommendations on banking laws and regulations issuedby the Basel Committee on Banking Supervision. Thepurpose of Basel II, which was initially published in June2004, is to create an international standard that bankingregulators can use when creating regulations about howmuch capital banks need to put aside to guard against thetypes of financial and operational risks banks face.Advocates of Basel II believe that such an international
 
standard can help protect the international financialsystem from the types of problems that might arise shoulda major bank or a series of banks collapse. In practice,Basel II attempts to accomplish this by setting up rigorousrisk and capital management requirements designed toensure that a bank holds capital reserves appropriate tothe risk the bank exposes itself to through its lending andinvestment practices. Generally speaking, these rulesmean that the greater risk to which the bank is exposed,the greater the amount of capital the bank needs to hold tosafeguard its solvency and overall economic stability.b.Objectivei.The final version aims at:1.Ensuring that capital allocation is more risksensitive;2.Separating operational risk from credit risk,and quantifying both;3.Attempting to align economic and regulatorycapital more closely to reduce the scope forregulatory arbitrage.
ii.
While the final accord has largely addressed theregulatory arbitrage issue, there are still areas whereregulatory capital requirements will diverge from theeconomic. Basel II has largely left unchanged thequestion of how to actually define bank capital,which diverges from accounting equity in importantrespects. The Basel I definition, as modified up to thepresent, remains in place.

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