Basel I

AAA

DEFINITION of 'Basel I'

A set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets.

INVESTOPEDIA EXPLAINS 'Basel I'

The first accord was the Basel I. It was issued in 1988 and focused mainly on credit risk by creating a bank asset classification system. This classification system grouped a bank's assets into five risk categories:

0% - cash, central bank and government debt and any OECD government debt
0%, 10%, 20% or 50% - public sector debt
20% - development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (under one year maturity) and non-OECD public sector debt, cash in collection
50% - residential mortgages
100% - private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and equipment, capital instruments issued at other banks

The bank must maintain capital (Tier 1 and Tier 2) equal to at least 8% of its risk-weighted assets. For example, if a bank has risk-weighted assets of $100 million, it is required to maintain capital of at least $8 million.

RELATED TERMS
  1. Basel III

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

    An international organization fostering the cooperation of central ...
  3. Basel Accord

    A set of agreements set by the Basel Committee on Bank Supervision ...
  4. Organization for Economic Cooperation ...

    A group of 30 member countries that discuss and develop economic ...
  5. Basel II

    A set of banking regulations put forth by the Basel Committee ...
  6. Capital Requirement

    The standardized requirements in place for banks and other depository ...
RELATED FAQS
  1. Why do banks securitize some debts, and how do they sell them to investors?

    Banks may securitize debt for reasons that include risk management, balance sheet issues, greater leverage of capital and ... Read Full Answer >>
  2. What should you take into consideration when choosing a portfolio management service?

    Hiring a portfolio management service or a portfolio manager should be a logical decision based on topics of consideration ... Read Full Answer >>
  3. Which markets are most prone to market failure from adverse selection?

    Adverse selection causes market failure -- a sub-optimal level of beneficial trades -- whenever material information cannot ... Read Full Answer >>
  4. What does it mean to be absolutely risk averse?

    Some people are absolutely risk-averse, which means that they cannot tolerate sustaining any sort of loss, even a temporary ... Read Full Answer >>
  5. What are some popular mutual funds that give exposure to the drugs sector?

    The pharmaceutical industry has experienced outstanding growth in the 10 years leading up to 2015, consistently outperforming ... Read Full Answer >>
  6. What is the correlation between equity risk premium and risk?

    The equity risk premium refers to the amount of additional return an investor can obtain from investing in an asset over ... Read Full Answer >>
Related Articles
  1. Personal Finance

    Using Economic Capital To Determine Risk

    Discover how banks and financial institutions use economic capital to enhance risk management.
  2. 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.
  3. Personal Finance

    What Is The Bank For International Settlements?

    Get the scoop on the structure and functions of the oldest global financial institution.
  4. Personal Finance

    How Basel 1 Affected Banks

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

    Investing Early In The Future of Data Security

    Data breaches are becoming increasingly common. Among the foremost technologies paving the path for the future of data security is biometrics.
  6. Economics

    Will “Internet-Only” Banks Change Chinese Banking?

    Private players offering internet-only banking services to a large section of China's population must overcome some challenges to gain market momentum.
  7. Trading Strategies

    Understanding Bottoms & Bottoming Patterns

    Analysis lowers the risk of bottom picking by identifying common characteristics of securities transitioning from downtrends to uptrends.
  8. Economics

    What is Adverse Selection?

    Adverse selection occurs when one party in a transaction has more information than the other, especially in insurance and finance-related activities.
  9. Fundamental Analysis

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
  10. Mutual Funds & ETFs

    U.S. Investors Are Seeking Opportunities Overseas

    A latest analysis leads to believe that many investors are applying a spring cleaning approach to their portfolios, rebalancing as the 1st quarter ended.

You May Also Like

Hot Definitions
  1. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  2. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
  3. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  4. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  5. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  6. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
Trading Center