Basel Accord (Basel II) which provides a new regulatory

Basel II

Establishment
/ Introduction

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In 1988, the Basel Committee on
Banking Supervision (BCBS) issued The First International Capital Standard, Basil I, which was fully adopted by
G-10 countries in 1992. The main objective was to secure bank holdings so that
credit institutions could absorb credit losses. (?irts
Brasli?ša, 2013)

 

In April 2003, the third
consultative paper (CP3) was published on the new Basil Capital Accord (Basel
II) which provides a new regulatory capital requirements for banks. Afterwards,
banking regulators around the world have come to a common understanding that
Basel II is more about risk management than capital regulation. (Li, 2011)

Overview

 

One of the latest financial crises
like the Asian financial crises, the Russian financial crises and the collapse
of Barings made the banks much worse than the minimum requirements of Basel I.
Furthermore, the latest financial innovations such as the securitization
(loans, mortgages, etc.) made the banks easily in dealing with the existing
Accord. So, for all of these reasons led the Basel Committee to focus heavily
on increasing risk sensitivity to minimum capital requirements as well as
improving risk management in banks, leading to the emergence of Basel II.

Here are the main objectives of
Basel II according to (Li, 2011):

 

•    Enhancing
Safety and integrity in the financial system by maintaining the current level
of capital

•    Enhancing
competitive equality

•    Forming
more comprehensive approach for risk addressing

•    Containing
an enough capital for risk considering

•    Developing
a flexible framework which reflects risks that are possibly exposed the banks
in a more accurate way, so that banks would respond to financial innovations in
risk management practices.

Key
Features

 

To achieve these objectives, the
Committee is trying to establish a new framework. It contains three pillars
that reinforce each other and should meet all the above features which are they
according to (Li, 2011):

 

•   
Pillar 1: “Minimum
capital requirements” that include market, credit and operating risks.

•    Pillar
2: “Supervisory review” which defines the framework of banking supervision

•    Pillar
3: “The Market discipline” which defines the framework for market disclosure by
banks.

Implementation
Progress

 

The Basel Committee on Banking
Supervision (BCBS) has explicitly accepted that a degree of flexibility is
allowed and a variety of options will be launched in the new accord. There will
be a need for monitoring and tracking in applying the rules with regard in
valuable implementation through all of the world (Nieto &
Schmit, 2008).

 

The nature of the new Basel II
agreement will cause to a different explanations and implementation. Countries
who are members on the Basel committee will adopt a “better” framework that
suits their market structure and their environments. However, other countries
that their infrastructure is not ready will make effort to apply the rules of
Basel II (Nieto & Schmit, 2008).

Current
Status

 

It seems to be obvious that Basel
II is being implemented through all of the world but in different percentages.

 

 

Basel III

Establishment

 

In 2007/2008 a global financial
crises occurred. For this reason, Basel III was published in January 2009. A
group of 20 countries have endorsed this accord as it’s known by the G-20
countries and are they Argentina, Australia, Brazil,
Canada, China, European Union, France, Germany, India, Indonesia,
Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey,
United Kingdom, and United States. (Adu-Gyamfi, 2016)

Overview

 

Basel III was being done to improve
global capital, liquidity and risk assessment rules to achieve a top level of
flexibility in the sector of banking. Main key channels for achieving these
objectives are increasing and strengthening the capital, increasing risk
coverages and establishing the requirements of liquidity. (Šútorová
& Teplý, 2014)

 

Based on Bank for International
Settlements, two main objectives were introduced for Basel III in 2009 and are
they according to (Adu-Gyamfi, 2016):

 

•    Improving
global capital and liquidity regulations with the respect of making the banking
sectors more flexible.

•    Strengthen
the ability of banking sector in absorbing shocks resulting from financial and economic
pressures.

Key
Features

 

What distinguish Basel III from
Basel II is about the quality and quantity of the capital requirements,
“Counter Cyclical measures” which means how the quantity of economics is in
related with the economic changes. Basically, it’s all about improvement from
Basel II to Basel III (Adu-Gyamfi, 2016).

Implementation

 

Basel III is implemented as a
result of more than 8300 banks operating in the European Union which is
accounted as 50% of global banking assets. Basel III regulations are only
executed to “internationally active banks”. The Capital Requirements Directive
IV “CRD IV” confirmed that these rules and regulations are applied in all of
the banks and the investment firms. However, some of the rules that are required
on Basel III differ in some banking regulatory framework. (Šútorová
& Teplý, 2014)

Current
Status

 

It can be assumed that Basel II is
already implemented. All of the other central banks in the world are on the
phase of starting to apply Basel III.