BASEL ACCORD
Defines the set of recommendations for set of rules & regulations for the banking industry, mainly for capital requirements to avoid banks going bankrupt
Consists of central bankers from various countries (11 countries of the G20 countries as of now)
Meetings held in Basel, Switzerland
BASEL 1 in 1988
Basel 1 came in 1988 = mainly set rules for capital reserve requirements to be kept by banks (due to risk of bad loans (credit risk) made by banks). 1. Credit risk faced by banks taken into consideration for calculating capital set aside requirement 2. Thus, banks had to set aside 8% of the RWA(risk weighted asset) loan made by banks to avoid bank insolvency if people dint pay back loan.
Assets defined different weights as per their riskiness, eg: Govt bonds =carries 0% risk i.e. 0 weight in risk calculation, Good rating bonds (AAA) = 20%, municipal bonds = 50% risky etc.
Thus, if Banks held bonds worth $10 m of a v good rated Co (AAA) then its RWA would be 20% of that i.e. 20% of 10m i.e. 2 million would be considered risky and thus 8% of this 2 m bank would have to keep aside as capital requirement as per Basel 1. 3. Quality of counter party was not considered = one of the main weaknesses of the Basel 1 (i.e. no differentiation if GE/Apple/Microsoft took loans or any new companies with no CF’s at all)
Basel 2 in 2004
Again calculation of how much capital to be kept aside by banks due to risks arising from credit risk, market risk(banks hold a lot of positions in capital mkt so risk involved) and operational risk(fraud, natural catastrophe, govt changes etc) was discussed in Basel Accord 2. 1. Credit risk+ Market risk+ Operational risk 2. Risk management process brought into place = Regulators can come inhow mgnt structure is of bank and how banks can measure and quantify the risk (Internal Capital Adequacy Assessment Process = ICAAP) 3. External reports = Banks must show how it measures and quantifies risk 4. Quality of counterparty considered, unlike in Basel 1

Basel 3 in 2010
Not yet implemented by all the banks yet, need to by 2016-17. 1. Liquidity requirement – This accord talks about not just the amt of capital to be held by the bank but the classification of it, like, CET1 (Common shares issued by banks), AT (Additional Tier – where term is perpetual and issuing bank has no incentive to redeem, Tier 2 Capital – Min term be 5 yrs and issuing bank has no incentive to redeem)

2. Leverage ratios set

3. Capital buffer in good time to withstand bad times

BANK RISKS 1. ALM risk 2. Currency risk 3. Interest risk = Banks has assets in the form of mortgage loans taken by customers and liability in the form of deposits made by people, so if interest rate% goes up, banks will have to pay more as interest for deposits in short term while will receive less in interest from pool of MBS it has as asset as it is long term and thus gain gets spread over for long term. 4. Liquidity risk = coz banks deal with different maturities (they transfer maturities)

Asset side of risks = loan made by banks (credit risk), investments made by bank in capital mkt (from which banks earns interest/div)i.e. Market Risk
Liability side of risks = deposits of ppl
Off B/s risks = operational