Basel Accord Essay Example | Topics and Well Written Essays - 1000 words

Basel Accord - Essay Example The paper tells that the Basel Committee on Bank Supervision (BCBS) was originally established in the 1970s to tackle the new challenges of banking across international boundaries. It became apparent that the failings and collapse of one country's banks was now being felt in other countries all over the world. It was obvious that intervention and prevention was necessary. In the 1980s, the United States Congress, pushed domestic regulatory agencies to set and enforce standards, including a fixed proportion of capital a bank must hold, or capital adequacy. This is how the Basel Accords began. The accords have been adapted and expanded in attempts to meet needs and to speak to aspects that previous version of the accords may not have addressed sufficiently. In order to understand the Basel Accords better it is useful to review them individually in order to better compare and contrast the variations. The BCBS determined that bank capital would be organized into 2 separate tiers. Tier 1f ocuses on the higher-quality capital, those that represents items of the lowest priority of repayment and easiest to absorb when lost. Most of Tier 1 involves â€Å"core† capital, or common equity, which arises from actual ownership in the bank, like common stock, undivided profits, and surplus monies. Tier 2, also called supplementary capital, include certain reserves, and term debt. The capital under Tier 2 can be divided into 2 more sublevels; the upper focuses on maintaining characteristics of being continuous, like preferred capital, and equity. The lower level, is the least costly for banks to issue because it pertains to debts with a time of maturity of at least 10 years.(Eubanks, 2010) Basel I was the first attempt made to establish a standard of regulating international banking and it came under a great deal of criticism. Opponents felt that the Basel I Accord approach to â€Å"risk-weighing assets.† They claimed that this system is too broad and lacks the fin ite specialization to address all of the unique risks that apply to the differing assets held by the bank. As a response the BCBS released a revision to the accord called the â€Å"International Convergence of Capital Measurement and Capital Standards: Revised Framework,† which is, also, known as Basel II.(Larson, 2011) Basel II Basel II differs from Basel I in a distinct way. It introduced a section of â€Å"Pillars,† which intended to rectify the capital adequacy issues with Basel I. Pillar 1, specifically, deals with the procedures of calculating the required capital within banking organizations. This accord will determine risk potential based upon the totality of their credit risk, market risks, and operational risks. Pillar 2, ideally, was placed to increase, both, accountability and transparency with the banking system. Pillar 3 works to require banking institutions to disclose risk exposures, allowing for better assessment of the needed safety to help create a