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Basel Accords

The Basel Accords are a set of international banking regulations developed by the Basel Committee on Banking Supervision. The accords are designed to promote stability in the global financial system by setting standards for minimum capital requirements for banks. The first Basel Accord, known as Basel I, was released in 1988 and significantly revised in 2004. Basel II was published in 2006 and made some changes to the risk weighting of assets, while Basel III was finalized in 2010 with an emphasis on liquidity and capital ratios. Banks are required to hold a certain level of regulatory capital against their assets, with more risky assets requiring more capital to be held. The purpose of this is to protect depositors from losses in the event that a bank becomes insolvent. To meet these requirements, banks typically raise capital through equity and debt issuance. Basel III introduced new liquidity standards, including the Liquidity Coverage Ratio and the Net Stable Funding Ratio, which are designed to ensure that banks have sufficient liquidity to withstand periods of stress.

The Basel Accords have been criticized for their role in exacerbating the global financial crisis of 2007-2008, as banks were able to increase their leverage to higher levels than would have been possible without the regulations. Nevertheless, the accords continue to be an important part of the regulatory landscape for banks around the world.