Basel I
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Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992. A new set of rules known as Basel II was later developed with the intent to supersede the Basel I accords. However they were criticized by some for allowing banks to take on additional types of risk, which was considered part of the cause of the US subprime financial crisis that started in 2008. In fact, bank regulators in the United States took the position of requiring a bank to follow the set of rules (Basel I or Basel II) giving the more conservative approach for the bank. Because of this it was anticipated that only the few very largest US Banks would operate under the Basel II rules, the others being regulated under the Basel I framework. Basel III was developed in response to the financial crisis; it does not supersede either Basel I or II[clarification needed], but focuses on different issues primarily related to the risk of a bank run.
Background
The Committee was formed in response to the messy liquidation of Cologne-based Herstatt Bank in 1973. On 26 June 1974 a number of banks had released Deutschmarks (the German currency) to the Herstatt Bank in exchange for dollar payments deliverable in New York City. Due to differences in the time zones, there was a lag in the dollar payment to the counterparty banks; during this lag period, before the dollar payments could be effected in New York, the Herstatt Bank was liquidated by German regulators.
This incident prompted the G-10 nations to form the Basel Committee on Banking Supervision in late 1974, under the auspices of the Bank for International Settlements (BIS) located in Basel, Switzerland.
Main framework
Basel I, that is, the 1988 Basel Accord, is primarily focused on credit risk and appropriate risk-weighting of assets. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of 0% (for example cash, bullion, home country debt like Treasuries), 20% (securitisations such as mortgage-backed securities (MBS) with the highest AAA rating), 50% (municipal revenue bonds, residential mortgages), 100% (for example, most corporate debt), and some assets given No rating. Banks with an international presence are required to hold capital equal to 8% of their risk-weighted assets (RWA).
The tier 1 capital ratio = tier 1 capital / all RWA
The total capital ratio = (tier 1 + tier 2 + tier 3 capital) / all RWA
Leverage ratio = total capital/average total assets
Banks are also required to report off-balance-sheet items such as letters of credit, unused commitments, and derivatives. These all factor into the risk weighted assets. The report is typically submitted to the Federal Reserve Bank as HC-R for the bank-holding company and submitted to the Office of the Comptroller of the Currency (OCC) as RC-R for just the bank.
From 1988 this framework was progressively introduced in member countries of G-10, comprising 13 countries as of 2013[update]: Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United States of America.
Over 100 other countries also adopted, at least in name, the principles prescribed under Basel I. The efficacy with which the principles are enforced varies, even within nations of the Group.