What is Basel Accord?
Global Banking Regulators pooled their intellectual resources to form the BCBS, which comprises banking regulators from 27 international jurisdictions. They devised a series of standards for Risk Management which are revised periodically. Three different versions of Basel Accords are available, with Basel 3 being the latest one.
Basel I: Basel Accord of 1988 (Basel I) created a uniform approach for banking capital adequacy standards. It focused on managing credit risk by recommending minimum capital of 8% of a bank’s risk-weighted assets.
Basel II: Basel II framework replaced Basel I in 2006. It included trading and lending activities in capital adequacy standards and imposed disclosure suggestions and standards for bank supervision by regulators.
Basel III: Basel III was born in response to the financial crisis of 2007–2009. This system factors both company-specific (idiosyncratic) risk and market-level (systematic) risk.
Why is it essential to know Basel Accord?
Basel II frameworks form the foundation of Risk Management. Over the years, the Basel Accord has strengthened to cover all critical aspects of the evolving risk management domain. Hence, the know-how of the Basel Accord is vital for all Risk Professionals.