Basel Accord

DEFINITION of 'Basel Accord'

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. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  2. Basel III

    A comprehensive set of reform measures designed to improve the ...
  3. Bank For International Settlements ...

    An international organization fostering the cooperation of central ...
  4. Tier 1 Capital

    A term used to describe the capital adequacy of a bank. Tier ...
  5. Capital Adequacy Ratio - CAR

    A measure of a bank's capital. It is expressed as a percentage ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European ...
Related Articles
  1. Fundamental Analysis

    Analyzing A Bank's Financial Statements

    A careful review of a bank's financial statements can help you identify key factors in a potential investment.
  2. Personal Finance

    Using Economic Capital To Determine Risk

    Discover how banks and financial institutions use economic capital to enhance risk management.
  3. Personal Finance

    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?
  4. Personal Finance

    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.
  5. Insurance

    Basel II Accord To Guard Against Financial Shocks

    Problems with the original accord became evident during the subprime crisis in 2007.
  6. Personal Finance

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  7. Investing

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
  8. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  9. Personal Finance

    How the Green Card Lottery Really Works

    Here's how the popular green card lottery, run by the U.S. State Department, operates, including some tips on improving your odds of winning.
  10. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
RELATED FAQS
  1. If my brother-in-law, who works at a pharmaceutical company, tells me about his research ...

    Tier 1 capital measures a bank's financial strength. It is composed of the company's common stock and retained earnings. ... Read Full Answer >>
  2. What is the difference between tier 1 capital and tier 2 capital?

    Under the Basel Accord, a bank's capital consists of tier 1 capital and tier 2 capital, and the two types of capital are ... Read Full Answer >>
  3. How are investment banks regulated in the United States?

    Investment banks in the United States are continuously reviewed and regulated by the Securities and Exchange Commission, ... Read Full Answer >>
  4. What is the difference between investment banks and merchant banks?

    Merchant banks and investment banks, in their purest forms, are different kinds of financial institutions that perform different ... Read Full Answer >>
  5. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Full Answer >>
  6. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center