The Basel Capital Accords

Update: September 2010

“Agreement was reached on Basel 3, the new international regulatory regime for banks. The rules raise the minimum amount of capital lenders are required to have as a cushion against unexpected losses. They will have until 2019 to comply fully with the 7% core Tier 1 capital-ratio requirement. Investors were relieved at the comfortable timetable; critics, however, argued that the rules were too lax.” For additional details see: “Basel’s Buttress: New Rules on Bank Capital and Derivatives Trading”, The Economist, September 16, 2010.

Update: July 2010.

This “Timely Topic” was originally prepared in 2006 because, we argued, it “was a subject you should be aware of if you are in the field of finance”. That assertion is truer now than it was then and we were reminded of this “Timely Topic” by a brief editorial in The New York Times, July 17, 2010. The conclusion of “Meanwhile in Basel” is that “the lesson of the last few years is that the banks do not have the best interest of the financial system at heart. The Basel committee should do its job and come up with tough rules needed to prevent another meltdown”.

Update march 2009: A new book has arrived: Quantification of Operational Risk Under Basel II: The Good, The Bad, The Ugly by Imad A. Moosa. It can be found at this call number HD 61.M6144 2008

Update: November 2008. This guide was originally done in 2006. New resources relating to Basel continue to arrive and our purpose here is to alert you to one of them: Basel II Implementation: A Guide to Developing and Validating a Compliant Internal Management Risk System, by Ozdemir and Miu. Information about the book (and cd) provided by the publisher is presented below, before our original guide begins:

"Many financial institutions around the world must prove minimum compliance to the Basel II Accord by 2015. For several banks, implementing internal risk rating systems (IRRS) is simply Basel II compliance. However, when carried out with a proper focus on bottom-line growth, this regulation has been shown to enhance a bank's risk-management practices and competitiveness in the market. Basel II Implementation is an invaluable guide that puts a potent combination of theory and real-world practice at your fingertips.

Written by two of the most globally recognized and sought-after thought leaders in Basel II implementation, this how-to book maps out, step-by-step, implementable solutions that are both academically credible and practical, making them defendable to regulators and executable within the constraints of data, resources, and time. Organized to sequentially follow IRRS development under Basel II, each section of this go-to guide provides:

• An introduction to the Basel II concept
• A variety of techniques for reaching compliance, based on research conducted by the authors and supported by Standard & Poor's
• Corporate case examples that illustrate implementation in the real world

The Basel Capital Accords

We are including this subject as one of our "Timely Topics" even though this is 2006 and the Basel Capital Accord was released in 1988 (Basel I). We are doing so since the impact of Basel II is much more likely to be a subject you should be aware of if you are in the field of finance.
Basically Basel I was an attempt to regulate banks to ensure that their capital reserves were adequate enough to offset major losses. In an attempt to address some of the weaknesses in the original accord, Basel II is much more complex and contentious and its impact will be more widely noticed. . The purpose here is to direct you quickly to useful resources and books about Basel.
The primary web-based resource is the site of the Bank for International Settlements - http://www.bis.org/ . There you can quickly learn about Basel II which is known more formally as: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. There are many other web resources, but this is the official site and it is the place to begin.
We include below, a list of books and articles which is not at all exhaustive. We recommend highly the Gup book for those who are beginning to research the subject - The New Basel Capital Accord. It is very thorough and contains many references. For those who are interested in banking regulation generally we suggest: Sandos, J.A.C. "Bank Capital Regulation in Contemporary Banking Theory: A Review of the Literature," Financial Markets, Institutions & Instruments, 2001, Vol.10, No.2, p.41 (available electronically to members of the Western academic community). As well, see the new book by Hal Scott: Capital Adequacy Beyond Basel: Banking Securities, and Insurance.

The Second Basel Accord

Selected Books

Borio, Claudio Ed.
Market Discipline Across Countries and Industries
HG4523.M267x 2004

CMHC (Canada Mortgage and Housing Corporation)
The Impact of the 1988 Basel Capital Accord and Prognosis for the Future
DBW JL103.9.H682S32 2004-20

Deacon, John
Global Securitisation and CDOs
HG4028.A84D43 2004

Ffrench-Davis, Ricardo and Griffith-Jones, Stephany
From Capital Surges to Drought: Seeking Stability for Emerging Economies
HG3891.F765 2003

Gup, Benton
The New Basel Capital Accord
HG1616.C34G873 2004

Llling, Mark
The New Basel Capital Accord and the Cyclical Behaviour of Bank Capital
HC111.W665 2004 no.30

Mikdashi, Zuhayr Ed.
Financial Intermediation in the 21st Century
HG3891.5.F54 2001

Wood, Duncan
Governing Global Banking: The Basel Committee and the Politics of Financial Globalisation
HG1725.W66 2005

World Bank
Analyzing and Managing Banking Risk: A Framework for Assessing Corporate Governance and Financial Risk
Internet Access

Selected Articles

These articles are all available to members of the Western community of scholars. If you have difficulty finding any of them or if you would like to locate more articles, books or studies, consult with your librarian.

"Canadian Banks and Basel II"
Diana Chant. CA Magazine Toronto. October 2005. Vol.138, Iss.8, p.14 (1pp).

"Effects of the New Basel Capital Accord on Bank Capital Requirements for SMEs"
Edward I. Altman, Gabriele Sabato. Journal of Financial Services Research. Dordrecht. Oct.2005. Vol.28, Iss.1-3, p.15.

"Basel II Means Big Changes"
Anonymous. ELT Arlington. October 2003. Vol.15, Iss.9, p.49-52.

"Will Basel II Affect the Competitive Landscape?"
Ed Blount, Bill Streeter. American Bankers Association. ABA Banking Journal. New York. Sept. 2003. Vol.95, Iss.9, p.59-63.

"Basel II: Changing the Way Banks Account for Risk"
Eileen Colkin Cuneo. Bank Systems & Technology. New York: Sept. 2003. Vol.40, Iss.9, P.40.

"What Basel II Means for Risk Profiles"
Bank Technology News. New York. Aug 2003. Vol.16, Iss.8, p.42-43.

"Editorial: Reforming the Basel Accord"
Kern Alexander. Journal of International Banking Regulation. London. June 2003. Vol.4, Iss.4, p.298.

"Banks Face Risky Business of Basle"
Keith Saxton. Euromoney. London: Jan 2002. Iss 393, p.131-134.

"Reforming Bank Capital Regulation"
Anonymous. Journal of International Banking Regulation. London. Oct.2001. Vol.3, Iss.2, p.196-198.

"Editorial: Basel Proposals Face Criticism"
Oonagh McDonald. Journal of Financial Regulation and Compliance. London. Aug.2001. Vol.9, Iss.3, p.207-208.

"Deals & Deal Makers: International Banking Panel Proposes New Rules to Govern Capital Reserves"
By Jathon Sapsford. Wall Street Journal (Eastern Edition). New York, N.Y., Jan 17, 2001, p.C.16.

"Bank for International Settlements Announces New Market Risk Proposals"
Anonymous. Cash Management News. London. May 1995. Iss.109, p.1-2.