Comparative note on Basel-I, Basel-II and Basel-III
The Basel Accords refer to the banking supervision Accords—Basel I, Basel II and Basel III—issued by the Basel Committee on Banking Supervision (BCBS). It is a set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk. The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
The first Basel Accord, known as Basel I, it was issued in 1988 and focuses on the capital adequacy of financial institutions. The capital adequacy risk categorizes the assets of financial institution into five risk categories (0%, 10%, 20%, 50%, 100%). And banks capital was divided into T-1 or core capital and T-2 or supplementary capital. Under Basel I bank have to maintain minimum capital requirement of 8% on total risk weighted assets. In Bangladesh Basel-I was adopted in January 1996. But there were few limitations on Basel-I, such as it only focus on credit risk, does not levy any capital charge for operational risk, does not recognized portfolio diversification effect of credit risk, does not recognized the role of collateral etc. For overcoming all this limitations Basel committee introduce the Basel-II.
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. This frame work was finalized in 2004 and in Bangladesh it was came into force in January 2010. Basel-II states that bank should maintained capital not only covering credit risk but also covering market and operational risk. Basel II is based on three pillars: (1) Minimum capital requirements are the calculation of the minimum level of regulatory capital that a bank should hold. a bank is required to hold 10% of its risk weighted assets as risk...