Basel Accords and the banking sector


The collapse of the housing market, banking sector and the consequent financial crisis of 2007-08 showed the regulatory loopholes in the system, its flaws, defaults, inefficiencies. Therefore, in order to promote cooperation between central banks of different countries, foster financial stability and have internationally accepted standards for banking and regulation, the Bank for International Settlement (BIS) launched the Basel Norms/Accords. Basel I and II were launched before while the Basel Committee on Banking Supervision launched Basel III post the global financial crisis.[1]

Basel Accords (I&II)

The Basel Accords were introduced to have a better and more stringent regulation of the banking system to avoid bank failures and other defaults. As time passes, the methods evolve. Basel I was introduced in 1988. Its primary focus was to improve the strength and soundness of banks by having robust kind of capital. Its main aim was for the banks to have adequate quality capital to deal with financially stressful situations. It had a narrow view of safeguarding the banks from risks i.e., through a risk weightage of the capital. Basel II expanded on the standards prescribed by Basel I. It provided Supervisory Review as a tool to the regulator to deal with risks, not just credit risk, but also operational and market risk.

The central bank of each nation had a supervisory role where they ensured that the banks complied with the Capital Adequacy Ratio as well as functioned within the risk framework prescribed. It ensured more transparency and disclosure in the system. Basel III was a holistic perspective of the entire system. It aimed to have a resilient banking system with a better shock absorbing capacity. It tried having risk mitigating mechanisms by having more disclosure of risks, better risk management, better quality capital and higher minimum capital requirement. It further had better securitization, supervisory and regulatory mechanisms in place. It came up with more stringent regulations as it was launched post the GFC.[2]

Basel Accords III

As observed previously, during the global financial crisis, the banks had inadequate liquidity and excess leverage. Owing to this, Basel III introduced the abovementioned mechanisms. It focused on aspects of Liquidity Coverage Ratio, liquidity, Net Stable Funding Ratio (NSFR), creation of capital buffer, leverage, and Leverage Ratio for funding and capital. It further specified the kind of risks that could be taken under according to risk weightage, shifted the focus from short term funds and specified the sources for funds.

It further required the banks to have a liquidity ratio which is more than 3%. Moreover, Liquidity Coverage Ratio ensures that during a sticky the bank has enough and more high-quality liquid assets for survival in the short term. NSFR mandated the banks to have a secure fund profile. Basel III further introduced a Countercyclical Capital Buffer. Moreover, the capital conservation buffer (CCB) norm dealt with the capital requirements of the bank while it is going through a stressful phase. In accordance with this, banks are required to now have a CCB as well as common equity of 2.5%.[3]


[1] Agarwal, Varum. “ The ABCs of Basel I, II & III.” CAPGEMINI , 2014, https://www.capgemini.com/wpcontent/uploads/2017/07/the_abcs_of_basel_i_ii_iii.pd.

[2] Ibid.

[3] Ibid.

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