Basel Accord

What is the 'Basel Accord'

The Basel Accords are a set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk. The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

BREAKING DOWN 'Basel Accord'

The first Basel Accord, known as Basel I, was issued in 1988 and focuses on the capital adequacy of financial institutions. The capital adequacy risk, (the risk that a financial institution will be hurt by an unexpected loss), categorizes the assets of financial institution into five risk categories (0%, 10%, 20%, 50%, 100%). Banks that operate internationally are required to have a risk weight of 8% or less.

The second Basel Accord, known as Basel II, is to be fully implemented by 2015. It focuses on three main areas, including minimum capital requirements, supervisory review and market discipline, which are known as the three pillars. The focus of this accord is to strengthen international banking requirements as well as to supervise and enforce these requirements.

RELATED TERMS
  1. Basel II

    A set of banking regulations put forth by the Basel Committee ...
  2. Basel III

    A comprehensive set of reform measures designed to improve the ...
  3. Basel I

    A set of international banking regulations put forth by the Basel ...
  4. Tier 1 Capital

    A term used to describe the capital adequacy of a bank. Tier ...
  5. Risk-Based Capital Requirement

    A rule that establishes minimum required liquid reserves for ...
  6. Bank Capital

    The difference between the value of a bank's assets and its liabilities. ...
Related Articles
  1. Managing Wealth

    The Legacy of Basel I

    Basel I refers to a set of international banking rules enacted in 1988 by the Basel Committee on Bank Supervision.
  2. Personal Finance

    Basel II Accord To Guard Against Financial Shocks

    Problems with the original accord became evident during the subprime crisis in 2007.
  3. Managing Wealth

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  4. Managing Wealth

    Understanding The Basel III International Regulations

    The Basel III regulations mark a drastic reform in international banking. But how do they impact the future's investment landscape?
  5. Markets

    The Banking System: Commercial Banking - How Banks Are Regulated

    ByStephen D. Simpson, CFA The 2007-2008 mortgage bubble in the United States, and worldwide credit crisis, highlighted why banks are so heavily regulated; with such a key role in the economy, ...
  6. Markets

    Is Your Bank On Its Way Down?

    Find out how the Tier 1 capital ratio can be used to tell if your bank is going under.
  7. Investing

    The One Bank Poised To Thrive Despite New Regulations

    <p>Investors have been warming up to bank stocks in a big way. The KBW Bank Index jumped 50% over the past two years, and a brightening eco...
  8. Markets

    The New Global Banking Regulations To Avert Future Crisis

    These are the types of policies that are being developed to minimize the risks posed to the global financial system by banks which are too big to fail.
  9. Markets

    Explaining the Liquidity Coverage Ratio

    The liquidity coverage ratio requires banks and other financial institutions to hold enough cash and liquid assets on hand to weather market stress.
  10. Managing Wealth

    What Is The Bank For International Settlements?

    Get the scoop on the structure and functions of the oldest global financial institution.
RELATED FAQS
  1. How are international investment banking practices regulated?

    See which international organizations are responsible for overseeing and regulating global investment banks, including the ... Read Answer >>
  2. What is the minimum liquidity coverage ratio that a bank must have from 2016 to 2 ...

    Learn the purpose of the new liquidity coverage ratio requirements under the Basel III standards, and see the phase-in of ... Read Answer >>
  3. If my brother-in-law, who works at a pharmaceutical company, tells me about his research ...

    Discover what tier 1 capital measures about a bank. Tier 1 capital levels were mandated by Basel III following the financial ... Read Answer >>
  4. What is the minimum capital adequacy ratio that must be attained under Basel III?

    Find out more about the capital adequacy ratio, or CAR, and the minimum capital adequacy ratio that banks must attain under ... Read Answer >>
  5. What is the Federal Reserve Board's market risk capital rule?

    Learn about the market risk capital rule enacted by the Federal Reserve, and understand how this rule reflects the Basel ... Read Answer >>
  6. Are a bank's current assets counted as liquidity?

    Find out how bank assets are defined and how the Federal Reserve controls the definitions of, requirements for, and availability ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center