Question

Please give me the differences between BASEL I and BASEL II agreement.

Answer 1

Differences between BASEL I and BASEL II agreement

Basel Capital accord was proposed by Basel Committee on Bank Supervision (BCBS) to focus on minimising credit risk, setting a minimum capital risk adjusted ratio. Basel norms requires banks to keep minimum capital in proportion to its risk adjusted assets. According to this the banks have to identify the Tier 1 and Tier 2 capital and compute their Capital adequacy ratio.

• Basel I makes a poor assessment of risk, compared to Basel II.
• Only Basel II considers the credit rating of the assets to compute the risk weights
• Different from Basel I, Basel II proposes changes in the portfolio level.
• No distinction has made for customers though their risk profile differs.
• In Basel I, risk is viewed as contract level and in Basel II, risk is viewed in portfolio level
• Basel I ignores the correlation between the assets compared to Basel II

In short, Basel II is recommended than Basel I because it covers all the shortcomings of Basel I. Basel II presents a better analysis. Though it is better, it also suffers from some shortcomings.