An assignment on

Analysis among BASEL I, II & III

Course Title: Strategic Banking
Course Code: FNB 406

Submitted to:

Md. Alamgir Hossen

Assistant Professor

Submitted by:
Tanima Sarker (Student ID: 594)
BBA, Batch - 02

Department of Finance and Banking

Jahangirnagar University
Savar, Dhaka-1342

28th August, 2014

Basel
The Basel Accords are some of the most influentialand misunderstoodagreements in modern
international finance. It is a set of agreements set by the Basel Committee on Bank Supervision (BCBS),
which provides recommendations on banking regulations in regards to capital risk, market risk and
operational risk.

Basel Committee
Basel are products of the Basel Committeea group of eleven nations. After the messy 1974 liquidation
of the Cologne-based Bank Herstatt, decided to form a cooperative council to harmonize banking
standards and regulations within and among all member states. Their goal is to extend regulatory
coverage, promote adequate banking supervision, and ensure that no foreign banking establishment can
escape supervision. To achieve this goal, France, Germany, Italy, Japan, the Netherlands, Sweden,
Switzerland, United Kingdom, United States, and Luxembourg agreed in Basel, Switzerland to form a
quarterly committee comprising of each countrys central banker and lead bank supervisory authority.
At each meeting, the authorities of each country are authorized to discuss the status of the international
banking system and propose common standards that can assist the Committee in achieving its goals, but
as the Founding Document clearly states, the Basel Committee cannot enact legally binding banking
standards. Therefore, it is up to the member states themselves to implement and enforce the
recommendations of the Basel Committee.

Basel I
The Basel I accord has been promoted by the Basel Committee in 1988 and subsequently implemented
by the banks starting with 1992. It considered market and credit risk in the measurement of capital
adequacy and covered at first issues related to capital measurement (1st and 2nd tier), risk weighting
(associated to various asset classes 0%, 20%, 50% and 100%) and capital adequacy rules (8% ratio of
capital to risk weighted assets). It has 4 pillars:
Transitional and
The Constituents
A Target Standard
Implimenting
Risk Weighting
of Capital
Ratio
Agreement

Tier I Capital
Paid up Capital
Disclosed
Reserves

Tier II Capital

Characterized
assets
according to
risks

Set a universal
standard
8% risk
weighted
assets must be
covered by
TIER I and II

Central Bank
are requested
to create
strong
surveillence
and
enforcement
mechanism

Criticisms of Basel I
Basel-I was failed for incorporating risk into the calculation of capital requirements. It also criticize for
taking a too simplistic approach to setting credit risk weights and for ignoring other types of risk.

Basel II
In response to the banking crises of the 1990s and the aforementioned criticisms of Basel I, the Basel
Committee decided in 1999 to propose a new, more comprehensive capital adequacy accord. This is
known as Basel II. It has 3 pillars:

Under pillar 1, if the banks own internal calculations show that they have extremely risky, lossprone loans that generate high internal capital charges, their formal risk-based capital charges
should also be high. Likewise, lower risk loans should carry lower risk-based capital charges. It also
adds a new capital component for operational risk. pillar 2 is the supervisory review process .Banks
are advised to develop an internal capital assessment process and set targets for capital to
commensurate with the banks risk profile. Supervisory authority is responsible for evaluating how
well banks are assessing their capital adequacy. Pillar 3 considers market discipline. It is an indirect
approach that assumes sufficient competition within the banking sector.

Criticisms of Basel II
Unlike Basel I and Basel II which are primarily related to the required level of bank loss reserves that
must be held by banks for various classes of loans and other investments and assets that they have,
Basel III is primarily related to the risks for the banks of a run on the bank by requiring differing levels of
reserves for different forms of bank deposits and other borrowings.

Basel III
Basel III guidelines were released in December 2010. The financial crisis of 2008 was the main reason
behind the introduction of these norms. A need was felt to further strengthen the system as banks in
the developed economies were under-capitalized, over-leveraged and had a greater reliance on short
term funding. Also the quantity and quality of capital under Basel II were deemed insufficient to contain
any further risk. The purpose is to promote a more resilient banking system by focusing on four vital
banking parameters viz. Capital, Leverage, Funding and Liquidity.

Comparisons among Basel I, II and III

Topic
Introduction
Types of Risk
Covered

Basel I
1988: Credit Risk
1996: Market Risk
Credit Risk
Market Risk

Credit Risk
Market Risk
Operational Risk

Capital to Risk
Weighted
Assets Ratio
(CRAR)

CRAR
Supervisory Review
Market Discipline

Simple but
standard
4 major risk
categories of
assets and risk
weights
according to it
First international
measure to cover
banking risk

From simple to
complex and flexible
approach
Lesser risk weights in
complex approach

Main Tools of
Risk
Management

Ways of
Calculation of
Risk Weighted
Assets and CRAR

Major
Contribution

Basel II
2004

Limitation

Implementation
in Bangladesh

Too simple to
cover all risks
Banks had to
raise additional
capital

1994

Covered operational
risk apart from credit
and market risk
Recognized
differentiation and
brought flexibility
Better asset quality
helped banks to
reduce capital
requirements
Additional capital
requirements for
operational risk
Subprime crisis
expose the
inadequate credit and
liquidity risk covers of
banks
2007

Basel III
2010

Credit Risk
Market Risk
Operational Risk
Liquidity Risk
Counter Cycle Risk
CRAR
Supervisory Review
Market Discipline
Liquidity Coverage Ratio
Counter Cycle Buffer
Capital Conservation
Buffer
Leverage Ratio
Same as Basel II but additional
capital for capital
conservation and counter
cycle buffer

Liquidity risk management

Will help to build capital
during good time, which
can be used in stressed
situation like counter cycle
buffer
Introduction of capital
conservation buffer

Requirement of additional
CRAR between 2.5% to 5%
Increased requirement of
common equity share
capital

2014