Basel Accord & Implementation











 History of Basel Capital Framework


The Basel Capital Framework has its origins in the financial market turmoil that followed the breakdown of the Bretton Woods system of managed exchange rates in 1973. After the collapse of Bretton Woods, many banks incurred large foreign currency losses. On 26 June 1974, West Germany’s Federal Banking Supervisory Office withdrew Bankhaus Herstatt’s banking licence after finding that the bank’s foreign exchange exposures amounted to three times its capital. Banks outside Germany took heavy losses on their unsettled trades with Herstatt, adding an international dimension to the turmoil. In October the same year, the Franklin National Bank of New York also closed its doors after incurring large foreign exchange losses.

In response to these and other disruptions in the international financial markets, the central bank governors of the G10 countries established a Committee on Banking Regulations and Supervisory Practices at the end of 1974. Later renamed the Basel Committee on Banking Supervision (BCBS), the Committee was designed as a forum for regular cooperation between its member countries on banking supervisory matters. Its aim was and is to enhance financial stability by improving supervisory knowhow and the quality of banking supervision worldwide.

The Committee aimed to achieve its objectives by setting minimum standards for the regulation and supervision of banks; by sharing supervisory issues, approaches and techniques to promote common understanding and to improve cross-border cooperation; and by exchanging information on developments in the banking sector and financial markets to help identify current or emerging risks for the global financial system. Also, to engage with the challenges presented by diversified financial conglomerates, the Committee also works with other standard-setting bodies.

Currently, BCBS membership includes representation from 28 jurisdictions and countries are represented on the Committee 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’s decisions have no legal force. Rather, the Committee formulates supervisory standards and guidelines and recommends sound practices in the expectation that individual national authorities will implement them. The Committee encourages full, timely and consistent implementation of its standards by members.





       
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