Basel I

What is Basel I?

Basel I is a set of regulations related to international banking. This was created by the Basel Committee on Bank Supervision (BCBS), Basel, Switzerland. This committee basically defines minimum Capital needs for financial institutions. BCBS set up Basel I as the first group of regulations, which is known as Basel Accords. This also includes Basel II and Basel III. The aim of the accords is to standardise banking practices worldwide.

Basel I focus on credit risk along with risk-weighted assets (RWA). Assets under Basel I are classified based on the level of risk with it. Risk is classified with 0% being the lowest to 100% being the highest. Tier 1 capital suggests a capital of a more permanent type, which should make up for 50% of the bank’s total capital base. Tier 2 capital is quite of a fluctuating nature.

Story Behind Basel I

Major bankruptcies were found in the period between 1965 and 1981 in the United States. This era is commonly known as the savings and loan crisis era. Banks throughout the world were lending much money and the potential for Bankruptcy from major international banks were becoming a problem. The BCBS was formed in order to Handle and prevent this risk. The committee, therefore, consisted of central banks and supervisory authorities of 10 countries.

The committee first drafted a document that set up an international ‘minimum amount’ which consisted of the capital a bank should hold. In 1988, the Basel I Capital Accord was created.

Asset Classification System for Banks

Under Basel, the asset classification system for banks categorises assets into 5 risk categories. These assets are classified based on the nature of the debtor. This is based on risk percentage like 0%, 10%, 20%, 50% and 100%. It is mentioned below:

1. 0% Risk Category includes cash, government, debt, central bank debt and debt of governmental departments or organisations.
2. 10% risk category includes debt of countries with high Inflation recently or in the recent past.
3. 20% risk category includes development bank debts, OECD bank debt, non-OECD bank debt and debt under one year of maturity. It also includes non-OECD public sector debt.
4. 50% risk category includes residential mortgages.
5. 100% risk category includes private sector debts, non-OECD bank debt with maturity over a year, Real Estate, plant and equipment. It also includes capital instruments issued at other banks.