what are the basel accords 
the basel accords are a series of three sequential banking regulation agreements basel i ii and iii set by the basel committee on bank supervision bcbs the committee provides recommendations on banking and financial regulations specifically concerning capital risk market risk and operational risk the accords ensure that financial institutions have enough capital on account to absorb unexpected losses understanding the basel accordsthe basel accords were developed over several years beginning in the 1980s the bcbs was founded in 1974 as a forum for regular cooperation between its member countries on banking supervisory matters the bcbs describes its original aim as the enhancement of financial stability by improving supervisory knowhow and the quality of banking supervision worldwide later the bcbs turned its attention to monitoring and ensuring the capital adequacy of banks and the banking system the basel i accord was originally organized by central bankers from the g10 countries who were at that time working toward building new international financial structures to replace the recently collapsed bretton woods system the meetings are named basel accords since the bcbs is headquartered in the offices of the bank for international settlements bis located in basel switzerland member countries include australia argentina belgium canada brazil china france hong kong italy germany indonesia india korea the united states the united kingdom luxembourg japan mexico russia saudi arabia switzerland sweden the netherlands singapore south africa turkey and spain basel ithe first basel accord known as basel i was issued in 1988 and focused on the capital adequacy of financial institutions the capital adequacy risk the risk that an unexpected loss would hurt a financial institution categorizes the assets of financial institutions into five risk categories 0 10 20 50 and 100 under basel i banks that operate internationally must maintain capital tier 1 and tier 2 equal to at least 8 of their risk weighted assets this ensures banks hold a certain amount of capital to meet obligations for example if a bank has risk weighted assets of 100 million it is required to maintain capital of at least 8 million tier 1 capital is the most liquid and primary funding source of the bank and tier 2 capital includes less liquid hybrid capital instruments loan loss and revaluation reserves as well as undisclosed reserves basel iithe second basel accord called the revised capital framework but better known as basel ii served as an update of the original accord it focused on three main areas minimum capital requirements supervisory review of an institution s capital adequacy and internal assessment process and the effective use of disclosure as a lever to strengthen market discipline and encourage sound banking practices including supervisory review together these areas of focus are known as the three pillars basel ii divided the eligible regulatory capital of a bank from two into three tiers the higher the tier the less subordinated securities a bank is allowed to include in it each tier must be of a certain minimum percentage of the total regulatory capital and is used as a numerator in the calculation of regulatory capital ratios the new tier 3 capital is defined as tertiary capital which many banks hold to support their market risk commodities risk and foreign currency risk derived from trading activities tier 3 capital includes a greater variety of debt than tier 1 and tier 2 capital but is of a much lower quality than either of the two under the basel iii accords tier 3 capital was subsequently rescinded basel iiiin the wake of the lehman brothers collapse of 2008 and the ensuing financial crisis the bcbs decided to update and strengthen the accords the bcbs considered poor governance and risk management inappropriate incentive structures and an overleveraged banking industry as reasons for the collapse in november 2010 an agreement was reached regarding the overall design of the capital and liquidity reform package this agreement is now known as basel iii basel iii is a continuation of the three pillars along with additional requirements and safeguards for example basel iii requires banks to have a minimum amount of common equity and a minimum liquidity ratio basel iii also includes additional requirements for what the accord calls systemically important banks or those financial institutions that are considered too big to fail in doing so it got rid of tier 3 capital considerations the basel iii reforms have now been integrated into the consolidated basel framework which comprises all of the current and forthcoming standards of the basel committee on banking supervision basel iii tier 1 has now been implemented and all but one of the 27 committee member countries participated in the basel iii monitoring exercise held in june 2021 the final basel iii framework includes phase in provisions for the output floor which will start at 50 on jan 1 2023 rising in annual steps of 5 and be fully phased in at the 72 5 level from january 2028 these 2023 onward measures have been referred to as basel 3 1 or basel iv 