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.