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Basel Accord

What is Basel Committee?

The Basel Committee, established by the Central-bank Governors of the Group of Ten countries at the end of 1974, meets regularly four times a year. It has about twenty-five technical working groups and task forces, which also meet regularly.

The Committee�s members come from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and United States. Countries are represented by their central bank and also by the authority with formal responsibility for the prudential supervision of banking business where this is not the central bank.

The Committee does not possess any formal supranational supervisory authority, and its conclusions do not, and were never intended to, have legal force. Rather, it formulates broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements � statutory or otherwise � which are best suited to their own national systems. In this way, the Committee encourages convergence towards common approaches and common standards without attempting detailed harmonization of member countries� supervisory techniques.

The Committee reports to the central bank Governors of the Group of Ten countries and seeks the Governors� endorsement for its major initiatives. In addition, however, since the Committee contains representatives from institutions, which are not central banks, the decisions it takes carry the commitment of many national authorities outside the central banking fraternity. These decisions cover a very wide range of financial issues. One important objective of the Committee�s work has been to close gaps in international supervisory coverage in pursuit of two basic principles; that no foreign banking establishment should escape supervision; and that supervision should be adequate. To achieve this, the Committee has issued a long series of documents since 1975.

In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accord. This system provided for the implementation of a credit risk measurement framework with a minimum capital standard of 8% by end-1992. Since 1988, this framework has been progressively introduced not only in member countries but also in virtually all other countries with active international banks. In June 1999, the Committee issued a proposal for a New Capital Adequacy Framework to replace the 1988 Accord. The proposed capital framework consists of three pillars; minimum capital requirement, which seeks to refine the standardized rules set forth in the 1988 Accord; supervisory review of an institution�s internal assessment process and capital adequacy; and effective use of disclosure to strengthen market discipline as a complement to supervisory efforts. Following extensive interactions with banks and industry groups, the revised framework was issued on 26 June 2004. This text will serve as a basis for national rule-making and approval processes to continue and for banks to complete their presentations for the new framework�s implementation.

Over the past few years, the Committee has moved aggressively to promote sound supervisory standards worldwide. In close collaboration with many non-G-10 supervisory authorities, the Committee in 1997 developed a set of �Core Principles for Effective Banking Supervision�, which provides a comprehensive blueprint for an effective supervisory system. To facilitate implementation and assessment, the Committee in October 1999 developed the �Core Principles Methodology�.

In order to enable a wider group of countries to be associated with the work being pursued in Basel, the Committee has always encouraged contacts and cooperation between its members and other banking supervisory authorities. It circulates to supervisors throughout the world published and unpublished papers. In many cases, supervisory authorities in non-G-10 countries have seen fit publicly to associate themselves with the Committee�s initiatives. Contacts have been further strengthened by an International conference on Banking Supervisors, which takes place every two years.

The Committee�s Secretariat is provided by the Bank for International Settlements in Basel. The twelve person Secretariat is mainly staffed by professional supervisors on temporary secondment from member institutions. In addition to undertaking the secretarial work for the Committee and its many expert sub-committees, it stands ready to give advice to supervisory authorities in all countries.

What is Basel II?

It is an attempt to reduce the number of bank failures by trying a bank�s Capital Adequacy Ratio to the riskiness of the loans it makes. For instance, there is less chance of a loan to a government going bad than a loan to say, an Internet business, so the bank should not have to hold as much capital in reserve against the firm loan as against the second. The first attempt to do this worldwide was by the Basel committee for international banking supervision in 1988. However, its system of judging the relative riskiness of different loans was crude. For instance, it penalized banks no more for making loans to a fly-by-night software company in Thailand than to Microsoft; no more for loans to South Korea, bailed out by the IMF in 1998, than to Switzerland. In 1998, �Basel 2� was proposed, using much sophisticated risk classifications. However, controversy over these new classifications, and the cost to banks of administering the new approach, led to the introduction of Basel 2 being delayed until (at least) 2005.

Where is Basel Commission�s office Situated?

Basel Committee is governed under the Bank for International Settlements in Basel, Switzerland. The following is its address.

Secretariat of the Basel Committee
Bank for International Settlement
Centralbahnplatz 2, Basel
Phone: +41 61 280 9100
Fax: +41 61 280 8100

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