History And Purposes Of Basel Accords - Explanation And Analysis

Introduction to Basel Accords

Explain the history and purposes of the basel accords.
 

The Basel Accords consist of recommendations on legislation and banking regulations issued by the Committee on Banking Supervision, the committee is composed of the governors of the central banks of major economies in the world, and then may or may not be transferred to the rules of each State or common economic area. In 1999, the Basel Committee made a first proposal to introduce a new agreement on capital adequacy to replace the 1988, which was revised on January 2001 and April 2003[1].

This committee was born in 1975 as an advisory body and international cooperation, with the aim of promoting the adequacy of capital standards for banks of member countries. The same is composed of representatives of central banks and supervisory authorities of the countries of the Group of Ten (G-10), composed of: Belgium, Canada, the United States, France, Italy, Japan, the Netherlands, Sweden, Switzerland, United Kingdom, and Luxembourg.  One of the main recommendations of the Basel Banking Supervision, in recent years, has been the Basel II agreement, established in 1999[2].

This agreement rests on three pillars, namely: The minimum capital requirements, Supervision of capital adequacy, and Maintaining market discipline and public disclosure.  

Basel accords have faced some major challenges during the implementation period. However, the challenges vary depending on the dynamics of the industry. The framework was issued to address the capital requirement issue and deal with economic stress in the international banking industry that could lead to collapse of banks. One of the most significant challenges is the change of minimum capital requirement by the banks. It was difficult for banks to get the necessary capital to comply with this frame work. Another challenge during the implementation was the lack of expertise by the banks to oversee the implementation because they needed very experienced supervisors. Also, another challenge was the difficulty faced by banks to identify the relevant data and risk. Implementation of the accords would cost a bank between 50 million to 100 million Euros depending on factors such as size [3].

The banking industry has stabilized as a result of the introduction of the Basel accords. There have been substantial modifications to the system to measure the credit risk of each institution, requiring capital increases to cover operational risks, and also demanding quality requirements for managing all risks of banks. One of the attractions of the new agreement is the savings that represent for banks, reduced their investments as minimum capital requirement, from 2007, as banks using the foundation internal ratings to measure credit risk or those using advanced measurement technique for measuring operational risk would benefit from a capital reduction of 11% compared to the coefficient of Basel I; while for 2008, the reduction would be 25% compared with the same coefficient of Basel I[4].
By the adoption of Basel II, by the industrialized countries, which would reflect negatively on the stability of financial systems in emerging markets as a result of increased volatility and reducing the maturities of international capital flows Because of the lack of adequate recognition of the international diversification of banks, as a tool for managing credit risk, which could reduce the volume of loans.

Difficulties in Implementation of the Accords

First, is the existence of different regulatory systems within a single country, this could affect the loss of competitiveness for a large number of Latin American banking institutions. Secondly, homogenization of accounting standards and information on capital standards in all countries of Latin America. Thirdly, is the establishment of proper coordination between supervisory authorities of the countries? Strengthening effective coordination that must exist between the supervisory authorities and the banking community in each country.

Also the participants of that conference, held the view that adaptation and not the adoption of the recommendations of Basel II, should be the route to be followed by Latin American banking systems since adaptation would improve current practices standards standardization of ban
the outcomes from the first two BASEL Accords.

There are two agreements, Basel I and Basel II AND Basel III or New Basel Capital Accord, whose main features are listed below. 

BASELI:

In 1988, the Basel Committee published the first of the Basel Accords, which was nothing more than a set of recommendations with a common goal: to set a limit on the value of the credits to be granted a banking institution based of its own capital. These recommendations leverage limited the ability of banks at 12.5 times the value of the equity of the entity[5]. The Basel Accord I was gradually applied in international banks had a ratio of less than 8% at the time of its adoption.
These institutions placed a period of four and a half years to reach that percentage, fully entering into force the Agreement at the end of 1992[6].

BASEL II

However, that limit set in Basel I did not take into account the repayment capacity of the borrower, ie the credit limit granted, 12.5 times equity of each entity, was the same whether people are paid or highly solvent entities than others with higher risk of investment recovery[7]. In short, the credit risk was not considered. Basel II seeks to align the calculation of capital requirements of banks with the best and most advanced practices in risk management and thus contribute to greater stability of the international financial system[8].

Basel III

is a comprehensive set of reforms drawn up by the Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector These measures pursued. Improve the capacity of the banking sector to face disruptions caused by financial or economic stress of any kind, improve risk management and good governance in banks, and enhance transparency and disclosure of banks. The reforms are aimed at: the regulation of banks individual titles (micro dimension), to increase the responsiveness of each institution in periods of stress, systemic risks (macro-prudential dimension) that can accumulate in the banking sector as a whole, as well as the procyclical amplification of these risks over time⁷.These two dimensions are complementary, and that increasing the resistance of each bank the risk of disturbances is reduced in the overall system.

The overall benefits of the proposed Basel II are:  Creating incentives to improve risk assessment procedures. Improvements in the system of corporate governance. New Internal risk models.  Cultural change: Need to sensitize management. Risk management will require new and sophisticated reporting tools.  Information needs require large investments in technology. 

Consequences of Basel Accords

According to the Basel Committee, the economic and financial in recent years linked to the development crisis, the evolution and innovation of operations and banking and financial institutions, they led to more complex risks, so a new framework was required capital adequacy, since Basel I was not sufficiently sensitive to risks[9]. One of the main contributions of the new agreement is to create incentives for banks to improve risk assessment procedures which in the long run are supposed to mitigate against the emergence of an economic crisis in the world[10]. These incentives could be formalized through agreements between the supervisory bodies of the countries, especially in the areas of training and exchanges of experience; and by obtaining the support of multilateral agencies in technical and financial assistance.

The role of the IMF in the global financial market regulation it is to strengthen the international monetary and financial system; it is responsible for advising the consolidation of the financial sectors of member nations of the Fund, improve internal controls, end a series of basic principles on corporate governance, codes and standards of good practice and other aspects, such as: establishing systems changes that seek to stabilize international exchange rates[11]. Exchange control systems for its members also gain comparative advantages over other member countries.

The SDR was developed by the IMF in 1969 being a supplementary international reserves in the framework of the system of fixed parities Bretton Woods[12]. However the international offer of just two fundamental assets-the gold reserves and the US dollar-proved insufficient to cater to the expansion of international trade as well as financial flows which was taking place .  Consequently, the international community chose to create a new international reserve asset under the auspices of the IMF[13].

The IMF has the power to require information relevant member countries for their operations. The information can request the Fund to each member country may be on official holdings in their territories and bullion banks and currencies, gold production, exports and imports of gold[14], total exports of goods expressed in value of the national currency, balance of international payments situation of foreign investment in the territories of the member country and investments abroad owned by persons in their territories, national income, price indices of export and import, types buying rate - selling foreign currencies, full information of control measures in the member changes, detailed accounts of outstanding compensation for commercial and financial transactions amounts[15].

In October 2011, the IMF considered possible options to expand the SDR basket of currencies but ruled out making changes. The next review is scheduled to take place before the end of 2015 but the commission has recommended that studies extend the current basket until September 2016 so it is very likely that the inclusion of the Yuan is not raised until then.

Economist and historian Barry Eichengreen, in his book "Exorbitant Privilege: The Rise and Fall of the Dollar", recalls that in 1924, eleven years after the creation of the US Federal Reserve, the dollar had shifted to sterling as currency world reserve[16]. The euro has tried the same against the dollar and has not achieved only very partially. 

Basel I

The result of the liberalization of the financial sector and the main feature of the globalization of the world economy is the international movement of capital, organization, much of which is carried out under the international loan market. In recent decades, the quantitative changes in the parameters of the international loan market led to qualitative changes in the composition and role of the participants, the nature of the relationships between them, increase market volatility, the changing nature of its regulation and the composition and functions of regulatory authorities. The accumulated volume of these changes requires systematic and careful analysis, because actually changed the nature of the international loan market and its development came to a qualitatively new level[17].

In this case, since the international loan market - the difficult economic phenomenon is the most obvious impact of globalization of the world economy in its operation can be traced in the analysis of international interbank. This market, the most dynamic international loan market sector most affected by changes in the global economic space, and from this point of view, his analysis is particularly popular for understanding the processes taking place in the market international lending as a whole, so this topic is relevant[18]. 1. Determine the location of international interbank lending market in the structure of world capital market lending to reveal their function and role; 2. Performance characteristics of international interbank credit market;

CONCEPT interbank credit market
From the functional point of view, the world market of loan capital -. A system of market relations, ensuring the accumulation and redistribution of loan capital between countries; institutional position - a set of financial institutions through which market movement committed loan capital between countries, depending on supply and demand for it. Lending market in the world, carrying the international traffic of loan capital, it contributes to the continuity of the industrial and commercial capital of different countries cycle. Modern global loan market revived in the early twentieth Century 60[19]. At first, this market has developed slowly and mainly as the global currency market, where the late 50s make short-term operation (up to one year) with the demand for long-term loans[20].

The extension of loans (sometimes up to 15 years) helped to improve the overall loan market. In the late 60s the pace of development has increased, and in the loan market scale 70-80 have become enormous[21]. Domestic financial markets include the markets short-term and long-term loans, the national currency markets and in some secondary markets (including financial futures and options markets). These markets operate within the constraints of the government's economic policy. In financial markets international tradition .  

References:

Ayadi, Rym et al, Does Basel Compliance Matter For Bank Performance? (International Monetary Fund, 2015)

Banerjee, Sreejata, "Basel L And Basel Ll Compliance Issues For Banks In India" (2012) 5Macroeconomics and Finance in Emerging Market Economies

Baum, Christopher, Mustafa Caglayan and Neslihan Ozkan, "THE ROLE OF UNCERTAINTY IN THE TRANSMISSION OF MONETARY POLICY EFFECTS ON BANK LENDING*" (2012) 81 The Manchester School

Chorafas, Dimitris N, Basel III, The Devil And Global Banking (Palgrave Macmillan, 2012)

Eymen, Gürel, "BASEL III KRÄ°TERLERÄ°" [2012] Bankac

Giordana, Gaston A. and Ingmar Schumacher, "Bank Liquidity Risk And Monetary Policy. Empirical Evidence On The Impact Of Basel III Liquidity Standards" (2013) 27 International Review of Applied Economics

"Global Banking Rules Won't Stop Next Meltdown" (2013) 217 New Scientist

International Monetary Fund, "Singapore: Detailed Assessment Of Compliance On The Basel Core Principles For Effective Banking Supervision" (2013) 13 IMF Staff Country Reports

LeBor, Adam, Tower Of Basel (Public Affairs, 2013)

Masood, Omar and John Fry, "Risk Management And Basel‐Accord‐Implementation In Pakistan" (2012) 20 J of Fin Reg and Compliance

Samitas, Aristeidis and Stathis Polyzos, "To Basel Or Not To Basel? Banking Crises And Contagion" (2015) 23 J of Fin Reg and Compliance

Sanwal, Mukul, The World's Search For Sustainable Development (Cambridge University Press, 2015)

[1] Adam LeBor, Tower Of Basel (Public Affairs, 2013).

[2] Omar Masood and John Fry, "Risk Management And Basel‐Accord‐Implementation In Pakistan" (2012) 20 J of Fin Reg and Compliance.

[3] Rym Ayadi et al, Does Basel Compliance Matter For Bank Performance? (International Monetary Fund, 2015).

[4] Sreejata Banerjee, "Basel L And Basel Ll Compliance Issues For Banks In India" (2012) 5Macroeconomics and Finance in Emerging Market Economies.

[5] Sreejata Banerjee, "Basel L And Basel Ll Compliance Issues For Banks In India" (2012) 5Macroeconomics and Finance in Emerging Market Economies.

[6] "Global Banking Rules Won't Stop Next Meltdown" (2013) 217 New Scientist.

[7] CHRISTOPHER BAUM, MUSTAFA CAGLAYAN and NESLIHAN OZKAN, "THE ROLE OF UNCERTAINTY IN THE TRANSMISSION OF MONETARY POLICY EFFECTS ON BANK LENDING*" (2012) 81 The Manchester School.

[8] Gaston A. Giordana and Ingmar Schumacher, "Bank Liquidity Risk And Monetary Policy. Empirical Evidence On The Impact Of Basel III Liquidity Standards" (2013) 27 International Review of Applied Economics.

[9] Aristeidis Samitas and Stathis Polyzos, "To Basel Or Not To Basel? Banking Crises And Contagion" (2015) 23 J of Fin Reg and Compliance.

[10] International Monetary Fund, "Singapore: Detailed Assessment Of Compliance On The Basel Core Principles For Effective Banking Supervision" (2013) 13 IMF Staff Country Reports.

[11] Omar Masood and John Fry, "Risk Management And Basel‐Accord‐Implementation In Pakistan" (2012) 20 J of Fin Reg and Compliance.

[12] Adam LeBor, Tower Of Basel (Public Affairs, 2013).

[13] Dimitris N Chorafas, Basel III, The Devil And Global Banking (Palgrave Macmillan, 2012).

[14] CHRISTOPHER BAUM, MUSTAFA CAGLAYAN and NESLIHAN OZKAN, "THE ROLE OF UNCERTAINTY IN THE TRANSMISSION OF MONETARY POLICY EFFECTS ON BANK LENDING*" (2012) 81 The Manchester School.

[15] Rym Ayadi et al, Does Basel Compliance Matter For Bank Performance? (International Monetary Fund, 2015).

[16] Sreejata Banerjee, "Basel L And Basel Ll Compliance Issues For Banks In India" (2012) 5Macroeconomics and Finance in Emerging Market Economies.

[17] Rym Ayadi et al, Does Basel Compliance Matter For Bank Performance? (International Monetary Fund, 2015).

[18] "Global Banking Rules Won't Stop Next Meltdown" (2013) 217 New Scientist.

[19] Omar Masood and John Fry, "Risk Management And Basel‐Accord‐Implementation In Pakistan" (2012) 20 J of Fin Reg and Compliance.

[20] Gürel EYMEN, "BASEL III KRÄ°TERLERÄ°" [2012] Bankac.

[21] Mukul Sanwal, The World's Search For Sustainable Development (Cambridge University Press, 2015).