Question

Critically analyse the three pillars with respect to the Basel Accords

Answer 1

The Basel Accords are based on the three pillars of banking rules and regulations which are Basel I, II, and III, formed by the Basel Committee on Bank Supervision.The committee give recommendations on banking, particularly the capital risk, market risk, and operational risk. The accords specify that financial institutions have sufficient capital on account to meet the uncertain losses.

Basel I

The Basel Accord, called as Basel I, was formed in 1988 which is focused on the capital sufficiency of financial institutions. The capital adequacy involves risk, which further categorizes the assets of financial institutions in five risks which are categorized from 0%- 100 % and In Basel I, banks that operate globally necessary to have a risk weightage of upto 8% or less than that.

BASEL II

The second Basel Accord, also known as Basel II, served as an notification of the original accord. It supervises on three main areas: capital requirements, review of capital adequacy and checking process, and the use of disclosure as a tool to make market regulate in dicipline and which also motivate good banking practices which involves supervisory review as well.

BASEL III

At the time of the financial crisis, the Basel commettie of bank supervision decided to update and to strong all the accords. The Basel commettie of banking supervision decided to consider poor control and management risk improper incentive plans, and borrowed huge funds to purchase assets in banking industry as reasons for the downfall because of the more borrowed funds for investment

Basel III is in the continuance of the three pillar with additional requirements and security features. For examople, the Basel III necessarily require banks to have a minimum common equity and less liquidity ratio.