Effective banking supervision: Basel Accord

An interesting background on bank regulation, the Basel Accord. The Basel Accord is an international standard used to determine the capital adequacy ratio of the banking industry and has been adopted by hundreds of countries and regions. The Basel Accord was born due to the failure of two well-known international banks, Herstatt bank and Franklin National Bank. Their bankruptcy has made regulators aware of the importance of banking regulatory issues.

After these two banks went bankrupt. In September 1975, the first Basel Accord was introduced. This accord is relatively simple. The basic core content is to put forward two key requirements for international banking supervision. First, any bank's overseas institution cannot escape supervision. Second, the country where the subject is located and the country where the transnational is located should share responsibilities. Basel I clarifies the regulatory capital requirements for credit risk, and divides the capital that banks can provide into two levels: Tier 1 capital is not less than 50% of regulatory capital (including paid-in capital and public reserves), that is, 4% of RWA, at least 2 % Is common stock. Tier 2 capital (including undisclosed reserves, revaluation reserves, general reserves, hybrid instruments and sub-prime mortgage crisis). Since then, for the first time, the world's financial institutions have had a unified set of financial capital regulatory rules. Of course, it is impossible for a global system of financial supervision system to succeed at one time. The Basel Accord has undergone continuous improvement. In 1999, Basel I was revised extensively.In 2004, the "Basel Salary Agreement" was formally proposed, proposing three pillars of capital management (minimum capital requirements, supervision and review, and market self-discipline) advocate the use of internal rating methods, a more complete banking risk supervision system has been formed. In 2007, the outbreak of the global financial crisis led to a further update of the Basel Accord. According to the financial crisis, the Basel Committee issued some new documents and formulated new standards for bank supervision, which constituted Basel III. It strictly limits the scope and conditions of the use of the internal model method, and further refines the RWA weights corresponding to asset classes. And require financial institutions to submit the calculation results of Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).(Tiankai wang,2010)

Frequency of sovereign debt defaults in the past 200 years (from BCBS)

We all know that most of bank profits come from loans, financial investments and other financial services. Depositors deposit money in the bank, and the bank lends the money out, creating interest margins. When some loans suddenly fail to be repaid on time, the bank cannot guarantee normal capital inflows and a crisis occurs. The Basel Accord is a manifestation of the emergence of these sub-prime mortgage crises. Simply, the Basel Accord is a global bank supervision standard, and all member states strictly follow this standard to supervise the banking industry.

References:

Journal of Risk & Financial Management; Oct2020, Vol. 13 Issue 10, p1-13, 13p, 1 Chart

Federal Reserve Bank of St. Louis Review. 2018, Vol. 100, Issue 2, pages. 30