A lowdown on the Accord that started it all, Basel I.

1. BASEL PRIMER - BIS & BASEL I
Aditya Lathe

2. Bank for International
Settlements
Basel I

3. Bank for International
Settlements
 Established: May 1930 at
Basel, Switzerland, after World War I.
 Founding Members: United
Kingdom, France, Italy, Japan, Belgium, the
United States and Germany.
 Function: Handling the
collection, administration and distribution of
annual reparations (~ $8bn over 59 years)
from Germany to the Allies.
 Choice of Switzerland due to its position as
an independent, neutral country; offering
least exposure to undue influence from any of
the major powers.

4. Organization Structure
 Inter-governmental organization, not accountable
to any national government.
 Limited Liability Company, with share capital held
by Central Banks / Monetary Authority of 60
countries.

5. Functions
 Bank for Central Banks and
International Organizations.
 Forum for discussion and cooperation
among central banks and the financial
community.
 Promoting monetary and financial
stability.
 Conducting research on policy issues
confronting central banks and financial
supervisory authorities.

6. Basel Committee on Banking
Supervision (BCBS)
 Originally established by Central Bank
Governors of G-10 nations in 1974.
 Currently has members from 27 nations
(including India).
 Formulates broad supervisory standards &
guidelines, and recommends them to
individual authorities. Accordingly, it
encourages international convergence
towards common supervisory approaches &
standards.
 Committee has no formal supranational
supervisory authority & its conclusions do not
carry legal force.

8. BCBS Publications
2010
2004 Basel
1988 Basel III
II
Basel I
 1988 - International Convergence of Capital
Measurement and Capital Standards.
 2004 - Basel II: International Convergence of
Capital Measurement and Capital Standards: A
Revised Framework.
 2010 - Basel III: A Global regulatory
framework for more resilient banks and
banking systems.

9. Bank for International
Settlements
Basel I

10. Basel I
 Consultative document prepared by
G-10 nations in 1988.
 Aimed at i) strengthening the
soundness and stability of
international banks ii) diminishing
competitive inequality among banks
 Designed to establish minimum levels
of capital for internationally active
banks.
 To be applied to banks on a
consolidated basis

11. Basel I
 Focus on Credit Risk and Country
Transfer Risk
 Country Transfer Risk incorporated by
grouping countries in terms of
riskiness

12. The Framework
 Capital for
Capital RWAs
safeguarding against
risk
 Risk Weighting the
bank’s loan book for
quantifying risk
 Target Standard Ratio
to stipulate minimum
level of Capital
 required relative to
Risk

13. Constituents of Capital
Tier I- Core Capital
 Equity Capital
 Disclosed Reserves
Tier II Tier II- Supplementary Capital
Supplementa
ry Capital  Undisclosed Reserves
(50%)
 Revaluation Reserves –
a) Formal revaluation
b) Latent Revaluation (55%
Tier I discount)
Core Capital
 General Provisions
(50%)
 Hybrid Debt Capital Instruments
 Subordinated Term Debt (Limited
to 50% of Tier I)

14. Deductions from Capital
 Goodwill deducted from Tier I Capital
 Investment in unconsolidated BFSI
subsidiaries deducted from Total
Capital.
 Investment in capital of other banks
and financial institutions- At the
discretion of national authorities.

15. Risk Weighting
 Direct Credit Exposures: Weighted Risk
Weight Ratio used to relate capital to
different categories of assets, weighted
according to level of riskiness
 Contingent Exposures:
Step I- Application of Credit Conversion
Factor (CCF) to account for credit risk of
off-balance sheet exposure (trade related
transactions/guarantees/derivatives)
Step II- Weighted Risk Weight Ratio to
relate capital to riskiness of exposure

16. Risk Weights (Direct Credit
Exposure)
0% 20% 50% 100%
Claims on Pvt.
Cash & Cash Claims on Banks Sector
Equivalents inc. in OECD
Claims on non-
OECD banks, with
loans above 1 year
Claims on Central Housing Loans
Claims on non-
Govt. & Central fully secured by
Claims on MDBs OECD central
Bank of home residential
Govts.
country property
Premises, Plant &
Equipment, other
Claims on banks Fixed Assets
Direct claims on
outside
OECD Central
OECD, with loans
Govts. & Banks All other Assets
upto 1 year

17. CCF (Contingent Exposure)
0% 20% 50% 100%
Transaction related Direct Credit
contingent items Substitutes (eg.
(eg. Performance Financial Bank
Bank Guarantees) Guarantees)
Credit Lines with
maturity upto 1 Short-term self
year, which can be liquidating trade
unconditionally credits (eg. LCs)
cancelled.
Sale & Repurchase
Credit Lines with
agreements, where
maturity above 1
Credit Risk is with
year
the Bank.

18. CCF (Derivatives)
 Choice between Current Exposure
Method or Original Exposure Method
 CEM = Total Replacement Cost (MTM
value of contracts) + Potential Future
Exposure (related to notional principal
amount and residual maturity)
Residual Interest Rate Exchange Rate
Maturity Contracts Contracts
< 1 year Nil 1.0%
> 1 year 0.5% 5.0%

19. Successes
 Implementation of the framework by
all Basel committee members (except
Japan) by 1992.
 Implementation by all countries
(including India) by 1999.

20. Failures
 Coverage of only Credit Risk
 Regulatory Capital arbitrage by some
banks, resulting in higher risk
Method I - Securitization of corporate
loans and sale of least risky assets.
Resultant portfolio is more
risky, however requires lesser capital
according to Basel I
Method II – Rolling forward short run
non-OECD bank debt instead of long

21. Thank You

22. References
 BIS Website (www.bis.org)
 Basel I Accord
 Basel I, Basel II, and Emerging
Markets: A Nontechnical Analysis by
Bryan J Balin
 Wikipedia