BASEL I Meaning and
Definition
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Basel I refers to the first set of international banking regulations known as the Basel Accord, which was developed by the Basel Committee on Banking Supervision (BCBS). Introduced in 1988, Basel I aimed to establish minimum capital requirements for banks in order to enhance their stability and protect against systemic risks.
Under Basel I, banks are required to maintain a minimum capital adequacy ratio (CAR) of 8%. This means that the bank's capital must be equal to or greater than 8% of its risk-weighted assets. The idea behind this capital adequacy ratio is to ensure that banks have sufficient capital to absorb potential losses and maintain financial stability.
The risk-weighted assets are calculated by assigning a certain weight or percentage to different types of assets and off-balance sheet exposures, based on their perceived level of risk. This classification allows for a differentiation in capital requirement based on the riskiness of the assets held by a bank.
Basel I was primarily focused on credit risk, measuring the risk that borrowers may default on their obligations. It did not adequately capture other types of risks, such as market risk or operational risk. The simplicity of the framework allowed for ease of implementation but was criticized for its limited coverage of risks and lack of differentiation between banks based on their risk profiles.
Overall, Basel I laid the foundation for subsequent iterations of the Basel Accords, which further refined and expanded the regulatory framework for international banks.
