From Basel I to Basel II

Abstract

This paper examines the journey from Basel I to Basel II. It examines the historical developments and the circumstances that led to the formulation of the famous Basel-I Accord in 1988, and its further refinement over the next two decades culminating in the finalization of a comprehensive document viz., the Basel-II Accord. The objective of the paper is to provide an insight into the long drawn and painstaking consultative process conducted under the aegis of the Basel Committee on Banking Supervision to address some of the long-standing weaknesses inherent in the original Basel Capital Adequacy Accord. The paper examines the process of development of the Basel Accord from a simple and crude credit risk measurement based capital adequacy accord into a comprehensive risk control framework grounded on three pillars: one, the Capital Adequacy Pillar which aims to improve the link between Bank Capital and the risks that could lead to Bank Insolvency; two, the Supervisory Pillar which aims to improve the Supervision Capacity of the regulators / supervisors to control the risk of bank failure; and three, the Transparency Pillar which is aimed at enhancing the capacity of the market’s Self Regulatory Mechanism. The paper acknowledges that by responding positively to some of the criticisms leveled at it during the various rounds of consultations the Committee has accommodated different points of views in the revised framework which has made it a more comprehensive and a more widely acceptable document for the bank supervisors around the world. The paper is expected to help facilitate a better understanding of the process of regulatory development.