Loading the player...

What is 'Basel I'

Basel I is a set of international banking regulations put forth by the Basel Committee on Bank Supervision (BCBS) that sets 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. Basel I is the first of three sets of regulations known individually as Basel I, II and III and together as the Basel Accords.

BREAKING DOWN 'Basel I'

Basel I was the BCBS' first accord. It was issued in 1988 and focused mainly on credit risk by creating a bank asset classification system.

The BCBS was founded in 1974 as an international forum where members could cooperate on banking supervision matters. The BCBS aims to enhance "financial stability by improving supervisory know-how and the quality of banking supervision worldwide." This is done through regulations known as accords.

Bank Asset Classification System

The Basel I classification system groups a bank's assets into five risk categories, classified as percentages: 0%, 10%, 20%, 50% and 100%. A bank's assets are placed into a category based on the nature of the debtor.

The 0% risk category is comprised of cash, central bank and government debt, and any Organization for Economic Cooperation and Development (OECD) government debt. Public sector debt can be placed in the 0%, 10%, 20% or 50% category, depending on the debtor. Development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (under one year of maturity), non-OECD public sector debt and cash in collection comprises the 20% category. The 50% category is residential mortgages, and the 100% category is represented by private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and equipment, and 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.

Implementation of Basel I

The BCBS regulations do not have legal force. Members are responsible for their implementation in their home countries. Basel I originally called for the minimum capital ratio of capital to risk-weighted assets of 8% to be implemented by the end of 1992. In September 1993, the BCBS issued a statement confirming that G10 countries' banks with material international banking business were meeting the minimum requirements set out in Basel I.

According to the BCBS, the minimum capital ratio framework was introduced in member countries and in virtually all other countries with active international banks.

RELATED TERMS
  1. Basel Accord

    The Basel Accord is a set of agreements on banking regulations, ...
  2. Basel Committee on Banking Supervision

    The Basel Committee on Banking Supervision is an international ...
  3. Basel III

    Basel III is a comprehensive set of reform measures designed ...
  4. Tier 1 Capital

    Tier 1 capital is a term used to describe the capital adequacy ...
  5. Cooke Ratio

    The Cooke Ratio is a capital adequacy ratio that expresses the ...
  6. Risk-Adjusted Capital Ratio

    Risk-adjusted capital ratios compare total adjusted capital to ...
Related Articles
  1. Personal Finance

    How Basel 1 Affected Banks

    The 1988 Basel 1 agreement sought to decrease bankruptcies among major international banks.
  2. Investing

    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?
  3. Insights

    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.
  4. Investing

    Using Economic Capital To Determine Risk

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

    How Will Bank Regulation Affect British Banks?

    We look at the proposed changes to Britain's banking system, and see whether it will be able to stay competitive.
  6. Investing

    Understanding Bank of America's Capital Structure (BAC)

    For banks, especially large banks such as Bank of America, capital structure has to both meet funding needs and satisfy the regulator's capital requirements.
  7. Small Business

    Understanding the Capital Adequacy Ratio

    The capital adequacy ratio (CAR) is an international standard that measures a bank’s risk of insolvency from excessive losses. Currently, the minimum acceptable ratio is 8%. Maintaining an acceptable ...
  8. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
RELATED FAQS
  1. How are risk weighted assets used to calculate the solvency ratio in regulatory capital ...

    Learn how risk-weighted assets are used to determine solvency ratio requirements under the Basel III accord, and see how ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. What are some of the well-known no-load funds?

    Find out more about the capital to risk-weighted assets ratio, what the ratio measures and the formula used to calculate ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center