Basel I
Candlefocus EditorBasel I, also known as the 1988 Basel Accord, is the first in a series of three international banking regulations known collectively as the Basel Accords. Developed in the late 1980s by the Basel Committee on Banking Supervision, the Basel I Accord was designed to protect against bank insolvency and limit counterparty risk.
Basel I is focused primarily on limiting credit risk and setting minimum capital adequacy requirements for banks. According to Basel I, a bank must hold a certain percentage of capital against its assets in order to offset any unexpected losses. This means that banks must have sufficient reserves of core capital—such as equity and retained earnings—in the event of adverse market conditions.
Under Basel I, the core Tier 1 capital ratio of a bank must meet or exceed 8%. This capital is used to provide protection in the event of losses from loans, investments, derivatives, and other assets that may occur as part of day-to-day banking operations.
Basel I introduced an advanced risk-based approach to reserve setting, and this is still the basis for the capital requirement framework in place today. Banks are required to assess all of the assets in their portfolio and classify them according to their risk level. This classification scheme should take into account the nature of the assets, the market conditions, and the past performance of the bank.
Banks can hold several types of capital assets to meet their capital requirements under Basel I, including common stock, preferred shares, and subordinated debt. The capital requirements of Basel I, while considered by many to be insufficient by today's standards, are still used as a base for setting risk and reserve requirements in the banking industry.
In summary, Basel I is a set of international banking regulations designed to limit credit risk and set minimum capital adequacy requirements for banks. The official goal of Basel I is to protect against the insolvency of banks and to limit the counterparty risk of loans, investments, and other assets. With the introduction of a risk-based approach to reserve setting, Basel I laid the foundation for the two subsequent Basel Accords that were introduced later. Even though Basel I is considered too limited by modern banking standards, it is still the basis for much of the risk management and capital requirements in place today.