Basel Accords Flashcards
What are the Basel Accords?
They are issued by the Basel Committee on Banking Supervision (BCBS) and are recommendations on banking regulations designed to safeguard depositor’s funds.
Who introduces the Accords for the EU
The European Banking Association (EBA) which are implemented into European Law
They ensure that the rules in each EU country is implemented and in the UK it is the Prudential Regulation Authority that has this role
What is the main principle of the Accords?
It specifies a calculation method to determine how much capital a bank should set aside to cover the losses in the event of defaults (customers not paying).
This allows banks to meet all its obligations such as repaying depositors
- Creates more robost fiscal disciplines in banks and thereby promotes confidence in the financial services industry
When was Basel 1?
In 1988 set out by BCBS - an international framework for deposit takers - set out minimum capital requirements for internationally active banks (those in operation in more than one bank)
What is the main part of Basel 2?
The 3 pillars
Pillar 1 = Credit, operational and market risk
Pillar 2 = Supervisory review
Pillar 3 = Market discipline
What is Basel 3?
Designed in response to 2007/8 crisis, EU published in June 2013 - for internationally active banks. More stringent suite of measures and calculations in respect of capital and also introduced requirements related to liquidity. Basel 3 does not replace Basel 2 just adds to it
Why was Basel 3 required?
As a result of financial crisis it became clear that there were inadequate risk management processes, partly due to the existing regulatory framework.
Banks failed to realise their inadequate capital in times of extreme stress and market disruption. Also failed to see result of wider economy
What are the two elements of Basel 3?
Two EU instruments
- The Capital Requirements Regulations (CRR)
- The Capital Requirements Directive
Together known as the CRD IV and was implemented in the UK in Jan 2014
