Question

What were the positive effects of the 1988 Basel Accord? What were its shortcomings?

Answer 1

Basel I is a compilation of international banking regulations laying down minimum capital requirements for financial institutions with the goal of reducing credit risk and fostering financial stability; In order to comply with Basel I, banks operating internationally are expected to maintain a minimum amount of capital (8 per cent) based on a per cent of risk-weighted assets.

Positive effects of implementation of Basel I standards

Substantial capital adequacy ratios of internationally active banks are increasing;
Structure which is fairly simple;
Worldwide embrace;
Increased competitive equality between banks active internationally;
More consistency in Resource Management;
A standard used by market participants for evaluation.

Weaknesses of Basel I standards

Capital adequacy depends on credit risk, although the study excludes other risks (e.g., market and operational);
There is no gap in credit risk assessment between debtors of different credit quality and rating;
Focus is put on book and not market values;
Insufficient risk and effect assessment of the use of new financial instruments, as well as risk mitigation techniques.