Could anyone please explain, what are basel-i and basel-ii?
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Answer Posted / anonymous
Basel 1 is the round of deliberations by central bankers
from around the world. Under this Basel accord, some
minimum capital requirements were set for banks. This
capital requirements would be based on the kind of risks
the bank faces. Although Basel 1 only considered "Credit
risk", Basel 2 later covered "Market risk" and "operational
risk" as well.
In Basel 1, Credit risk was calculated by risk-weighted
assets of banks.
e.g 0% weight if asset is a sovereign bond and 100% weight
if asset is a corporate bond (say unsecured). Banks with
international presence are required to hold capital to 8%
of this risk weighted asset value obtained.
Basel 2 can be consedered an improvement over Basel 1 and
consists of 3 pillars: 1. Minimum capital requirement 2.
Supervisory review 3. market discipline.
Basel 2 has many more methods of calculating credit, market
and operational risks and it also keeps internal ratings by
the banks into the play as well apart from external ratings.
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