Basel Accords

Overview

The Basel Committee on Banking Supervision is a committee of banking supervisors who collectively agree on a set of international standards for for bank capital, liquidity and funding. These standards are non binding, however, they are generally followed by member countries. As part of the published standards, Basel produces a set of formulas for managing bank risk. The formulas for calculating bank capital from a set of default models is available in the davinci library.

Basel I

The first accord was released in 1988. It specified two requirements of banks.

First, the ratio of assets to capital had to be less than 20.

Second, banks were required to keep capital equal to at least 8% of risk weighted assets. Further, the accord required that tier 1 capital comprise at least 50% of total capital.

Risk Weighted Assets

Tier 1 Capital: equity and non cumulative perpetual preferred stock

Tier 2 Capital

Basel II

Basel III