The Basel Accords are a series of guidelines drawn up by the Basel Committee at the end of 1974, formed by the governors of the G-10 central banks, to avoid systemic risks in situations of banking panic or bank run, which had their origin in the financial turmoil registered in the currency markets.
At the origin of the Committee is the idea acquired at that time that the problems of some entity spread rapidly beyond its borders.
For example, we find this fact with the bankruptcy of the German bank Bankhaus Herstatt, located in the Federal Republic of Germany. This bank was intervened in June 1974 by the German authorities due to its lack of viability. Among some measures that were taken, the dollar accounts that the bank maintained in its branch in New York were frozen.
Key issues of the Basel Accords
It is important to note that, although these agreements lack legal form, the Basel documents have been approved by the governors and supervisors of the world's largest economies. These documents revolve around four main themes.
- Principles on cross-border activity and cooperation between supervisors.
- Capital adequacy measures.
- Basic principles.
- Risk management and other aspects.
There are three agreements that are prolonged in time and modified based on the experience developed over time:
- Basel I : A minimum capital accord based solely on credit risk was established in 1988. In simple terms, it was established that the minimum capital must be at least 8% of the assets weighted by their risk.
- Basel II : Initially published in June 2004, it is based on three pillars ↓
- Pillar I. Minimum capital requirement analyzing in depth credit risk, market risk and operational risk.
- Pillar II. Banking supervision process based on the principles of vigilance of minimum capital ratios, control of risk calculation strategies and their supervision, monitoring and obtaining information, review of internal control and anticipation of intervention if necessary.
- Pillar III. Market discipline based on the provision of information in a clear and transparent way on risk management policies, capital adequacy and risk exposures on a frequent basis.
- Basel III : Measures aimed at related to the effects of increasing the quality of capital, improvement in the detection of risks under certain exposures, increase in capital requirements, constitution of capital buffers, definition of the leverage ratio and improvement in the risk management and liquidity ratios.
Composition of the Basel Committee
The Basel Committee is made up of 27 members (Germany, Saudi Arabia, Argentina, Australia, Belgium, Brazil, Canada, China, Spain, United States, France, Holland, Hong Kong, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, United Kingdom, Russia, Singapore, South Africa, Sweden, Switzerland and Turkey) bringing the central banks of these countries together four times a year.