The Basel Accords are a series of banking regulations agreed by The Basel Committee on Banking Supervision (BCBS), a group comprising representatives from 27 major financial centres which aims to regulate finance and banking practices on an international level.
Basel I, II and III were agreed in 1998, 2004 and 2013 respectively.
This page gives an overview of the Basel Accords and their implications for financial institutions.
Basel II – 2004
The purpose of Basel II was to ensure the liquidity of banks by stipulating the minimum levels of capital that financial institutions needed to put aside to offset potential losses from investment and lending. The Accord required banks to hold 2% of common equity and 4% of Tier 1 capital. By regulating this on an international level, Basel II attempted to ensure that no single national system could develop an unfair competitive advantage.
The Three Pillars of Basel II
- Minimum Capital Requirements
- Supervisory Review
- Market Discipline
The regulations were not popular with the banking industry, which generally believed self-regulation would be more effective.
Basel III - 2013
Following the UK banking crisis of 2007/08 a new, strengthened iteration of the Basel Accords was released: Basel III. This Accord was announced in January 2013, with an introduction schedule running to 2018.
Basel III built on the 2004 version by:
- Increasing common equity requirements to 4.5%;
- Increasing Tier 1 capital requirements to 6%;
- Introducing a minimum leverage ratio (Tier 1 capital divided by assets) of 3%;
- Introducing two required liquidity ratios (one, the Liquidity Coverage Ratio, requiring a bank to hold sufficient liquid assets to cover its net cash outflow for 30 days; the other, the Net Stable Funding Ratio, requiring available funding to exceed the required amount of stable funding “over a one-year period of extended stress”).
U.S. Implementation of the Basel Accords
In December 2011 the U.S Federal Reserve made the decision to implement all Basel III requirements, however the accord would not apply to all banks but all institutions with more the $50 billion in assets.
The U.S banking agencies (Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation) issued their final rule to implement the Liquidity Coverage Ratio (LRC), on Septermber 3 2014.