The Basel Accords, also known as the Basel agreements, are a set of international banking regulations that were first introduced in 1988 and have since been updated multiple times. The guidelines were established by the Basel Committee on Banking Supervision, which is composed of regulatory agencies from different countries, with the goal of improving the resilience and stability of the global banking system.
The Basel Accords consist of three main agreements: Basel I, Basel II, and Basel III. Each agreement builds upon the previous one, with the most recent version being Basel III. These agreements are not legally binding, but most countries have adopted them as part of their banking regulations.
The Basel Accords primarily focus on regulating the amount of capital that banks must hold to cover potential losses from their lending activities. Capital is the amount of money that banks have available to absorb potential losses, and the Basel Accords require banks to hold a minimum level of capital based on the riskiness of their assets.
Under Basel I, banks were required to hold a minimum of 8% of their risk-weighted assets in capital. Basel II introduced a more sophisticated risk management framework that allowed banks to calculate their capital requirements based on the specific risks of their investments. Basel III further increased the minimum capital requirement and introduced additional liquidity requirements to ensure that banks have enough funding to withstand financial shocks.
The Basel Accords have had a significant impact on the global banking industry. By requiring banks to hold more capital, the agreements have made the banking system more resilient to financial crises. However, some critics have argued that the regulations have also increased the cost of lending and reduced profitability for banks.
In conclusion, the Basel Accords are a set of international banking regulations that aim to improve the stability and resilience of the global banking system. Through these agreements, banks are required to hold a minimum level of capital to cover potential losses from their lending activities. While there have been criticisms of the regulations, the Basel Accords have had a significant impact on the banking industry and are likely to continue to shape banking regulations for years to come.