Investor's wiki
en English
Navigation
Home Glossary
InvestingStocksBondsCryptoPersonal FinanceFundamental AnalysisTechnical AnalysisTradingBankingTaxes
Disclaimer Terms of Use Privacy Policy Cookie Policy
Navigation
Home Glossary
InvestingStocksBondsCryptoPersonal FinanceFundamental AnalysisTechnical AnalysisTradingBankingTaxes
Disclaimer Terms of Use Privacy Policy Cookie Policy

Basel II

Basel II
InvestingLaws and RegulationsSECSec and Regulatory Bodies

What Is Basel II?

Basel II is a set of international banking regulations previously delivered in 2004 by the Basel Committee on Banking Supervision. It expanded the rules for least capital requirements laid out under Basel I, the primary international regulatory accord, gave a structure to regulatory supervision and set new disclosure requirements for surveying the capital adequacy of banks.

Figuring out Basel II

Basel II is the second of three Basel Accords. It depends on three principal "pillars": least capital requirements, regulatory supervision, and market discipline. Least capital requirements play the main job in Basel II and commit banks to keep up with certain ratios of capital to their risk-weighted assets.

Since banking regulations differed essentially among countries before the presentation of the Basel Accords, the unified structure of Basel I (and consequently, Basel II) assisted countries with normalizing their rules and mitigate market nervousness in regards to risks in the banking system. The Basel Framework currently comprises of 14 standards.

The Basel Committee is comprised of 45 members from 28 countries and different locales, addressing central banks and supervisory specialists. It has no legal authority to implement its rules however depends on the regulators in its member countries to do as such. Those regulators are expected to follow the Basel rules in full yet in addition have the carefulness to impose even stricter ones. For instance, in the United States, the regulators are the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.

Basel II Requirements

Building on Basel I, Basel II gave rules to the calculation of minimum regulatory capital ratios and confirmed the requirement that banks keep a capital reserve equivalent to no less than 8% of their risk-weighted assets.

Basel II partitions the eligible regulatory capital of a bank into three tiers. The higher the tier, the safer and liquid its assets.

Tier 1 capital addresses the bank's core capital and is made out of common stock, as well as unveiled reserves and certain different assets. No less than 4% of the bank's capital reserve must be as Tier 1 assets.

Least capital requirements play the main job in Basel II and commit banks to keep up with certain ratios of capital to their risk-weighted assets.

Tier 2 is viewed as valuable capital and comprises of things, for example, revaluation reserves, hybrid instruments, and medium-and long-term subordinated loans. Tier 3 comprises of lower-quality unsecured, subordinated debt.

Basel II likewise refined the definition of risk-weighted assets, utilized in computing whether a bank meets its capital reserve requirements. Risk weighting is planned to deter banks from facing excessive measures of risk challenges terms of the assets they hold. The primary innovation of Basel II in comparison to Basel I is that it assumes into account the praise rating of assets in determining their risk weights. The higher the credit rating, the lower the risk weight.

Regulatory Supervision and Market Discipline

Regulatory supervision is the second pillar of Basel II and gives a structure to national regulatory bodies to deal with different types of risks, including systemic risk, liquidity risk, and legal risks.

The market discipline pillar presents different disclosure requirements for banks' risk openings, risk assessment processes, and capital adequacy. It is expected to foster greater transparency into the sufficiency of a bank's business rehearses and permit investors and others to compare banks on neutral ground.

Upsides and downsides of Basel II

On the plus side, Basel II explained and expanded the regulations presented by the original Basel I Accord. It additionally assisted regulators with beginning to address a portion of the financial innovations and new financial products that had gone along since Basel I's presentation in 1988.

Basel II was not completely fruitful, nonetheless, and has even been called a hopeless disappointment in its central mission of making the financial world more secure.

The subprime mortgage meltdown and Great Recession of 2008 showed that Basel II underrated the risks implied in current banking practices and that the financial system was overleveraged and undercapitalized, in spite of Basel II's requirements.

Even the Bank for International Settlements, the organization behind the Basel Committee on Banking Supervision, today recognizes, "The banking sector entered the financial crisis with too much leverage and insufficient liquidity supports. These weaknesses were joined by poor governance and risk management, as well as improper incentive designs. The dangerous combination of these factors was exhibited by the mispricing of credit and liquidity risks and excess credit growth."

Answering the financial crisis, the Basel Committee issued new risk management and supervision rules to reinforce Basel II in 2008 and 2009. Those reforms and others issued in 2010 and later addressed the beginnings of the next Basel Accord, Basel III, which, starting around 2022, is as yet being phased in.

The Bottom Line

Basel II is the second of the three Basel Accords, developed to make international standards for bank regulation and reduce risk in the worldwide banking system. It based on and refined the original Basel Accord, presently known as Basel I, and prompted Basel III, which plans to address the deficiencies of the two prior accords.

Features

  • The second pillar of Basel II, regulatory supervision, gives a structure to national regulatory bodies to deal with systemic risk, liquidity risk, and legal risks, among others.
  • One weakness of Basel II arose during the subprime mortgage meltdown and Great Recession of 2008 when obviously Basel II misjudged the risks implied in current banking practices and that the financial system was overleveraged and undercapitalized.
  • Basel II, the second of three Basel Accords, has three primary fundamentals: least capital requirements, regulatory supervision, and market discipline.
  • Building on Basel I, Basel II gave rules to the calculation of least regulatory capital ratios and confirmed the requirement that banks keep a capital reserve equivalent to no less than 8% of their risk-weighted assets.

FAQ

What Is Basel II?

Basel II is a set of international banking regulations laid out by the Basel Committee on Banking Supervision, situated in Basel, Switzerland. Basel II was delivered in 2004, fully intent on being phased in over a series of years.

Did Basel II Replace Basel I?

Basel II based upon Basel I, refining and explaining a portion of its rules as well as adding new ones, however didn't supplant it through and through.

What Was Wrong With Basel II?

The beginning of the subprime mortgage meltdown in 2007 and the following worldwide financial crisis showed that the regulations made under Basel I and Basel II were deficient for shortening the risks that a few banks were taking, and the perils they presented to the worldwide financial system. Basel III, presented during the financial crisis nevertheless being phased in, plans to better address those risks.