What is the difference between Basel I and Basel II?

What is the difference between Basel I and Basel II?

The key difference between Basel 1 2 and 3 is that Basel 1 is established to specify a minimum ratio of capital to risk-weighted assets for the banks whereas Basel 2 is established to introduce supervisory responsibilities and to further strengthen the minimum capital requirement and Basel 3 to promote the need for liquidity buffers (an additional layer of equity).

Basal accords are introduced by Basel Committee of Banking Supervision (BCBS), a committee of banking supervisory authorities that was incorporated by the central bank governors of the Group of Ten (G-10) countries in 1975.

The main objective of this committee is to provide guidelines for banking regulations.  BCBS has issued 3 accords named Basel 1, Basel 2 and Basel 3 so far with the intention of enhancing banking credibility by strengthening the banking supervision worldwide.

What Is Basel I?

Basel I is a set of international banking regulations established by the Basel Committee on Banking Supervision (BCBS). It prescribes minimum capital requirements for financial institutions, with the goal of minimizing credit risk.

Under Basel I, banks that operate internationally were required to maintain at least a minimum amount of capital (8%) based on their risk-weighted assets. Basel I is the first of three sets of regulations known individually as Basel I, II, and III, and collectively as the Basel Accords.

  • Basel I, the first of three Basel Accords, created a set of rules for banks to follow to mitigate risk.
  • Basel I is now considered too limited in scope, but it laid the framework for the subsequent Basel Accords.
  • With the advent of Basel I, bank assets were classified according to their level of risk, and banks are required to maintain emergency capital based on that classification.
  • Under Basel I, banks were required to keep capital of at least 8% of their determined risk profile on hand.
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What Is Basel II?

Basel II is a set of international banking regulations first released in 2004 by the Basel Committee on Banking Supervision. It expanded the rules for minimum capital requirements established under Basel I, the first international regulatory accord, provided a framework for regulatory supervision and set new disclosure requirements for assessing the capital adequacy of banks.

  • Basel II, the second of three Basel Accords, has three main tenets: minimum capital requirements, regulatory supervision, and market discipline.
  • Building on Basel I, Basel II provided guidelines for the calculation of minimum regulatory capital ratios and confirmed the requirement that banks maintain a capital reserve equal to at least 8% of their risk-weighted assets.
  • The second pillar of Basel II, regulatory supervision, provides a framework for national regulatory bodies to deal with systemic risk, liquidity risk, and legal risks, among others.
  • One weakness of Basel II emerged during the subprime mortgage meltdown and Great Recession of 2008 when it became clear that Basel II underestimated the risks involved in current banking practices and that the financial system was overleveraged and undercapitalized.

What Is Basel III?

Basel III is an international regulatory accord that introduced a set of reforms designed to mitigate risk within the international banking sector by requiring banks to maintain certain leverage ratios and keep certain levels of reserve capital on hand. Begun in 2009, it is still being implemented as of 2022.

  • Basel III is an international regulatory accord that introduced a set of reforms designed to improve the regulation, supervision, and risk management of the banking sector.
  • Basel III is an iterative step in the ongoing effort to enhance the banking regulatory framework.
  • A consortium of central banks from 28 countries devised Basel III in 2009, largely in response to the financial crisis of 2007–2008 and ensuing economic recession. As of 2022, it is still in the process of implementation.
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What is the difference between Basel 1 2 and 3?

Basel 1 vs 2 vs 3
Basel 1Basel 1 was formed with the main objective of enumerating a minimum capital requirement for banks.
Basel 2Basel 2 was established to introduce supervisory responsibilities and to further strengthen the minimum capital requirement.
Basel 3Focus of Basel 3 was to specify an additional buffer of equity to be maintained by banks.
Risk Focus
Basel 1Basel 1 has the minimal risk focus out of the 3 accords.
Basel 2Basel 2 introduced a 3-pillar approach to risk management.
Basel 3Assessment of liquidity risk in addition to the risks set out in Basel 2 was introduced by Basel 3.
 Risks Considered
Basel 1Only credit risk is considered in Basel 1.
Basel 2Basel 2 includes a wide range of risks including operational, strategic and reputational risks.
Basel 3Basel 3 includes liquidity risks in addition to the risks introduced by Basel 2.
Predictability of Future Risks
Basel 1Basel 1 is backward-looking as it only considered the assets in the current portfolio of banks.
Basel 2Basel 2 is forward-looking compared to Basel 1 since the capital calculation is risk-sensitive.
Basel 3Basel 3 is forward-looking as macroeconomic environmental factors are considered in addition to the individual bank criteria.

FAQs.

What is Basel 1 2 3 norms?

The Basel Accords are a series of three sequential banking regulation agreements (Basel I, II, and III) set by the Basel Committee on Bank Supervision (BCBS). The Committee provides recommendations on banking and financial regulations, specifically, concerning capital risk, market risk, and operational risk.

What are the 3 pillars of Basel 2?

The Three Pillars of Basel II: Optimizing the Mix in a Continuous-time Model. The on-going reform of the Basel Accord relies on three “pillars”: capital adequacy requirements, centralized supervision and market discipline.

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What are the 3 Basel norms?

The BASEL norms have three aims: Make the banking sector strong enough to withstand economic and financial stress; reduce risk in the system, and improve transparency in banks.

Is Basel 3 implemented in India?

In response to COVID-19, the Reserve Bank of India recently announced it would defer implementation of certain Basel III capital and funding provisions until April 2021.

What is the difference between Basel 2 and 3?

The key difference between the Basel II and Basel III are that in comparison to Basel II framework, the Basel III framework prescribes more of common equity, creation of capital buffer, introduction of Leverage Ratio, Introduction of Liquidity coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

Who created Basel 3?

Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision and risk management of banks.