BASEL ACCORDS Meaning and
Definition
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The Basel Accords refer to a set of international banking regulations developed by the Basel Committee on Banking Supervision (BCBS). Established in response to financial crises and aimed at promoting stability within the global banking system, the Basel Accords outline guidelines concerning capital adequacy and risk management for financial institutions.
The first Basel Accord, known as Basel I, was implemented in 1988 and introduced standardized capital requirements for banks based on their credit risk exposure. It recommended a minimum capital adequacy ratio of 8% of a bank's risk-weighted assets, which served to protect against insolvency and enhance overall stability in the industry.
Recognizing the limitations and complexities of Basel I, subsequent agreements were developed. Basel II, introduced in 2004, aimed to strengthen risk management and mandate greater disclosure and transparency in the banking industry. It introduced three pillars: minimum capital requirements, supervisory review, and market discipline.
Following the global financial crisis in 2008, the Basel Committee introduced Basel III in 2010 to address the weaknesses exposed during the crisis. Basel III increased the minimum capital requirements, introduced new liquidity regulations, and enhanced risk measurement and management practices. Its objective was to improve the robustness and resilience of banks, ensuring they could withstand economic downturns and shocks.
The Basel Accords are internationally recognized and implemented by many countries. However, implementation varies across jurisdictions, as each country is responsible for incorporating the rules into its regulatory framework. These accords have played a significant role in promoting financial stability, ensuring the soundness of banking systems worldwide, and reducing the probability of future financial crises.
Etymology of BASEL ACCORDS
The term "Basel Accords" refers to a series of international banking regulations known as the Basel Accords or Basel Committee on Banking Supervision (BCBS). The word "Basel" originated from the location where the committee responsible for creating these regulations is based, which is Basel, a city in Switzerland.
The BCBS was established in 1974 by the central bank governors from several countries and aimed to enhance global financial stability. The committee initially developed a set of regulatory standards known as the Basel Capital Accord or Basel I, which focused on the minimum capital requirements that banks must hold to protect against financial risks.
Subsequently, in 2004, the committee introduced an updated version called Basel II, further refining and expanding the regulatory framework. Finally, in 2010, the committee unveiled Basel III, which enhanced the capital and liquidity requirements even more rigorously to strengthen the banking sector against future financial crises.
