Basel I summary

The Basel Committee was formed in response to the liquidation of a Europe-based bank in 1974 This incident prompted the G-10 nations to set up the Basel Committee on Banking Supervision (BCBS), under the direction and supervision of the Bank of International Settlements, which is in Basel, Switzerland. As a result of the liquidation of the bank, this committee instigated the Basel 1 Accord in 1988.

The Basel I Accord was the outcome of a round of consultations and deliberations by central bankers from around the world, which resulted in the publishing by the BCBS of a set of minimum capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992. Basel I was primarily focused on Credit Risk and Risk Weighted Assets (RWA). In order to offset risk, banks with an international presence were required to hold capital (which was classified as Tier 1, Tier 2 and Tier 3 to clarify the strength or reliability of such capital held) equal to 8% of their risk-weighted assets.

Assets were classified into categories according to the level of risk that is associated with that class of asset, ranging from risk-free assets, such as cash, government, and central bank debt and any OECD government debt, to 100% risk assessed assets, such as private sector debt, nonOECD bank debt with a maturity over a year, real estate, plant and equipment, capital instruments that are issued at other banks. Thus, the Total Capital Ratio, calculated as (Tier 1 + Tier 2 + Tier 3 Capital) / All RWA must be at least 8%. Off-balance-sheet items such as unused commitments, letters of credit and derivatives were also taken into account in the calculation of RWA.