Question

Compare and contrast the key differences between Basle 1, Basle 2 and Basle 3 capital accord.

(Please provide a 400 words explanation)

Answer 1

Bank,a financial institution are the backbone of economy of the country. Though it has a pivotal role to play, it is very sensitive too.

Some safety measures are made for there normal running of operation:

Basel1: It was recommended for implementation by the BCBS for mainly addressing the issue of credit risk in the year 1988. Basel 1 focus on credit risk.

As per Basel1, a bank should have sufficient capital to provide a stable resource to absorb any losses arising from risk in its business.

Basel2: The main objective of Basel2 was to replace the minimum capital requirement with a need to conduct a supervisory review of the bank' s capital adequacy.

Basel3: Basel3 specifies an additional layer of common equity for banks when breached ,restricts payouts to help meet the minimum common equity requirement.

Basel1 vs Basel2 vs Basel3

Basel1: It was formed with the objective of enumerate a minimum capital requirement for bank.

Basel2: It was established to introduce responsibility of supervision and to further strengthen the minimum capital requirement.

Basel3:It specifies an additional buffer of equity to be maintained by banks.

Risk Focus:

Basel1: It has the minimal risk Focus out of the 3 accords.

Basel2: Basel 2 introduced a 3 pillar approach to risk management.

Basel3:It assesses the liquidity risk in addition to the risks set out in Basel2 was introduced by Basel3.

Risk Considered

Basel1: Only credit risk is considered.

Basel2: It includes wider range of risk including operational, strategic and reputational risk

Basel3: It includes liquidity risk in addition to the risk introduced in Basel2.

Basel 1: Basel1 is backward looking as it is only consider the asset in the current portfolio of the bank.

Basel2: It is forward looking og Basel1 since the capital calculation is risk sensitive.

Basel3: It is forward looking as macroeconomic environmental factors are considered in addition to the individual bank criteria.