Sample Essay – Basel Accord
Basel Accord was based on an agreement for regulating international commercial banks and dates back to July 15, 1988 when minimum levels of capital were decided for them (Risk Financial Manager 643).
At the initial stage the capital requirements to be held by these private commercial banks were based on a standard set by Basel Committee on Banking Supervision (BCBS). A few years back, rules were revised by the Basel Committee under Basel II in the year 2006. This has prompted far more risk sensitive capital requirements while operational risks have been charged against so that losses are minimized. Similarly, banking group parents maintain the surety that risks are distributed and among entire banking groups at the same time double gearing is avoided.
It is based on the three pillars, namely, ‘minimum capital requirements’ as discussed above, ‘supervisory review process’ and ‘market discipline’.
According to the first pillar, minimum capital requirements are devised comprising of three elements such as risk weighted capital assets, minimum ratio of capital to these assets and the gist of regulatory capital. Similarly, for credit risk rating, banks can either use the devised standard or their own internal ratings, however, depending at the discretion of the bank supervisor.
Further elaborating on it, the Basel Accord requires capital to be at least equal to 8% of total risk weighted assets of the bank (Value at Risk 55). It further consists of two components, where ‘tier 1 capital’, also known as the core capital includes stocks and reserves from post tax earnings, and ‘tier 2 capital’ (supplementary capital) comprises of undisclosed reserves and perpetual securities (Value at Risk 56).
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