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Basel Accords and Framework Combine
Basel Accords and Framework Combine
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Pre-1988
• Banks were regulated using balance sheet measures
such as the ratio of capital to assets
• Definitions and required ratios varied from country
to country
• Enforcement of regulations varied from country to
country
• Bank leverage increased in 1980s
• Off-balance sheet derivatives trading increased
• LDC debt was a major problem
• Basel Committee on Bank Supervision(BCBS) set up
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Basel Committee on Banking
Supervision (BCBS)
• The Basel Committee on Banking Supervision (BCBS) is
a committee of banking supervisory authorities that
was established by the central bank governors of the
Group of Ten Countries in 1975.
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1988: BIS Accord
(Basel I)
• Capital regulations under Basel I came into
effect in December 1992 (after development
and consultations since 1988).
• The aims were:
– to require banks to maintain enough capital to
absorb losses without causing systemic
problems,
– to level the playing field internationally (to
avoid competitiveness conflicts).
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1996 Amendment
• Implemented in 1998
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Problem with Basel I
• Regulatory arbitrage was rampant
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Basel II
• Implemented in 2007
• Three pillars
– New minimum capital requirements for credit
and operational risk
– Supervisory review: more thorough and
uniform
– Market discipline: more disclosure
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Basel II: Pillar 1
• Pillar 1 of the Basel II system defines minimum
capital to buffer unexpected losses.
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Problems With Basel II
• Portfolio invariance.
• Single global risk factor.
• Financial system “promises” are not treated
equally—regulatory arbitrage facilitated by
“complete markets” in credit (the CDS market
particularly).
• Pro-cyclicality.
• Subjective inputs.
• Unclear and inconsistent definitions.
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Regulation of the financial markets is a never-ending process of modification,
improvement and extension. Nowhere is this clearer than in the case of the
Basel Accords.
Standardized
Approach
Foundation
IRB
Advanced
IRB
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Summary of Basel I, II, and III
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