Question

With respect to bank capitalization, what are the “Basel I” rules? Describe the weightings given to different types of debt.

Answer 1

Basel I are the first of three set of accords created by the basel committtee on bank supervision, set up in 1988, it has a set of rules which the banks of the country have to follow. It also requires a certain level of minimum capital that is to be kept by the banks in order to minimize the credit risk.The bank must maintain capital equal to at least 8% of its risk-weighted assets. Itsays that  banks that operate in foreign countries have to maintain a minimum amount of capital based on a percent of risk-weighted assets. And the weights given to different types of debts are as follows:

So, Basel I classification system classifies the banks on the basis of risk percentage that is 0%, 10%, 20%, 50% and 100%. And a bank's assets are placed into any of the above categories based on the nature of the debtor.

0% = includes cash, central bank and government debt, and OECD government debt.

10%= Any public debt

20%= Development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt which is under one year of maturity

50%= residential mortgages

100% =private sector debt, non-OECD bank debt which has maturity over a year,  real estate, plant and equipment, and capital instruments issued at other banks.