Question

what are the contrasts and similarities between Basel 1, 2, and 3?

why or for which reason each of them were introduced?

Answer 1

Similarity between all Basel norms:

The common objective of all Basel norms was to handle banking risks in light of the rapidly transforming international business environments. With the advancements in globalization, banks are interrelated across the world. If banks take reckless risks, disastrous situations can arise due to the huge amount of funds involved and the adverse impact can be soon dispersed among many countries. The subprime crisis that started on 2008 that caused a substantial economic loss is the latest example of this.

Difference between all Basel norms:

Basel 1 covered only credit risk. Basel 2 added operational, strategic & reputational risks. Basel 3 further added liquidity risk.

Also, Basel 1 had adopted backward looking approach while other two had forward looking approach.

Primary objective why each norm was introduced -

Basel 1: This was brought to light to ensure that banks meet minimum capital requirements.

Basel 2: In order to strengthen Basel 1, this was introduced to have supervisory responsibilities.

Basel 3: This norm went one step ahead in order to mitigate risk which required banks to have additional buffer of equity.