Question

The Basel Committee on Banking supervision has provided regulatory guidance to financial sector regulators around the world, especially in the developed economies. The 3 key regulatory frameworks of the Committee are embodied in the Basel Accords (I, II, III). With specific reference to private banks, provide a careful review of the Basel Accords.

The review should highlight and demonstrate the following:

a. The origin

b. The essence of the key pillars of each Accord

c. The weaknesses of the Accords

d. With a developing African country in mind, highlight the possible weaknesses of Basel III.

Answer 1

REVIEW OF BASEL ACCORDS:

Basel accords are banking supervision Accords issued by Basel committee of Banking supervisions. They are a tool for risk management in the financial industry.

They ae named BASEL because the BCBS maintains is secretariat at the Bank for International settlements in Basel, Switzerland. THe commitee of 27- members generally meet there.

Basel norms came into being due to a banking crisis A foreign exchange settlement risk caused a German bank named Herstatt cashless and to go bankrupt which led to the formation of Basel Norms.

Basel norms are risk management guidelines which mainly focuses on three risks.

• Credit risk
• Market risk
• Operational Risk

They mainly focus on Capital adequacy ratio.

Capital adequacy ratio ahould not be less that 8%, 9% for public banks, 12% for NBFS. In short banks should not take more risks than required.

BASEL 1:-

• Introduced in 1988 by BCBS.
• Focuses almost entirely on credit risk .
• defined capital structure for riske weighted for banks.

BASEL 2: -

• BASEL 2 uses a three pillar concept.
• minimum capital requirements
• supervisory reviews
• Market discipline

First pillar: It deals with regulatory capital maintenance for three cmajor components of risk that a bank faces.

second pillar : it basically focuses on the supervisory review processes.

Third pillar : Based in maeket discipline.

requires banks to disclose details on application, capital, risk exposure, risk assessment processes, and the capital adequacy of the institution.

WEAKNESS OF THE ACCORD:

Accord 1 :

• No diffrence between debtors of different wuality and rating
• More stress on book value than market value
• inadequate assessment of the risk

Accord 2:

• Complex internal rating method
• Difficult to be applied in East and Central europe.
• Responsibilities of supervisors of the banks are too much of too handle.

Accord 3:

• Increase in barriers dur to increase in capital requirements to enter the sector.

with relevance to African countries the increase in the cost of capital requirement is the biggest roadblock for the successful implementation of Basel 3. In African countries where there is already a less capital available , requlating it by provision with providing more capital would harm the banks of these geographies.

Basel 3 can further limit the supply of credit, specifically to small or medium sized banks and enterprises which are in need of uninterrupted financing.

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Hope it helps :)