The Basel Accord was created in 1988 by the Basel Committee in Basel, Switzerland. The accord was created following the central bankers in Germany making the Bank of Herstatt insolvent. The main objective of the accord was to provide guidelines pertaining to the minimal capital requirements for banks. Central bankers were now required to hold a certain level of capital adequacy in order to comply with the accord. According to the Basel I, any bank with international influence was required to have capital equal to 8% of risky assets. All central bankers were represented in the Basel Committee. These minimal requirements have also been introduced to the G-10 countries. Many believed there needed to be some addendums in the accord, so in 2004 the Basel II was introduced. The Basel II was composed of three pillars: minimal capital requirements, supervisory review, and market discipline. The first pillar deals with any issues pertaining to credit, market, and operational risk. They introduced different approaches to calculating each type of risk. Credit risk can be found by using the standardized approach, foundation IRB, and advanced IRB. IRB is the acronym for Internal Rating-Based Approach. The different ways to calculate operational risk are basic indicator approach, standardized approach, and the international measurement approach. Value at risk is the best way to find the market risk. The second pillar gives regulators guidelines to face certain risks they can encounter. The third pillar requires bankers to publicly disclose risk management activities, processes, and distributions. Due to the recent financial crisis, the Basel Committee has proposed the Basel III. The third of the Basel Accords would strengthen capital requirements and bring about new regulations to deal with bank liquidity and bank leverage. I do not believe the Basel Accord has fulfilled its responsibilities. The recent financial crisis is a perfect example of how the Basel accord has failed. All the banks in jeopardy during the 2008 crash could have been avoided if they would have followed the guidelines set by the accord. The 2008 financial crisis was caused by a complete systemic shut down. The Basel committee should be more aggressive in their implementation of the accords. Just like some banks believe they are “too big to fail,” they also think they do not need to follow certain rules and regulations. If banks start seeing consequences for their actions they will eventually start playing by the rules. The whole idea of the Basel Accord is good, but if no one cooperates it will never serve its true purpose.

http://en.wikipedia.org/wiki/Basel_I

http://en.wikipedia.org/wiki/Basel_ii

http://en.wikipedia.org/wiki/Basel_III