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Basel Accord
Practical Law Glossary Item 3-385-8479 (Approx. 3 pages)
Glossary
Basel Accord
Also known as Basel I and the Basel Capital Accord. Policy agreement on the supervision of banks, developed in 1988 by the Basel Committee. The Accord aims to achieve international agreement on the measurement of capital adequacy of banks and to establish minimum capital standards.
In 2004 the Basel Committee published Basel II, which is based on three "pillars":
- Pillar 1 - banks must determine their eligible capital and minimum capital requirements in relation to credit risk, operational risk and market risk taken on by the bank.
- Pillar 2 - a supervisory review process whereby supervisors are required to assess how well banks are assessing their capital requirements relative to the risks they are exposed to, and to intervene where necessary.
- Pillar 3 - market discipline, via a requirement for banks to disclose to their peers key information.
In December 2007, US bank regulators published the rule for US implementation of the capital adequacy framework set out in Basel II, that is mandatory for some US banks and optional for others (see Practice Note, Basel II: an overview and Practice Note, US Implementation of the Basel II Accord).
In December 2010, the Basel Committee published Basel III, which, among other things, will require banks to hold more and better quality capital and will impose additional and more stringent capital to risk-weighted assets and leverage ratios on banks. Basel III will be implemented beginning in 2013. For more information, see Article, Basel III: Overview and Implementation in the US and Practice Note, Basel III: an overview.