From Basel I to Basel III In this section, we will describe the Basel Committee’s approach to

1700 WordsApr 23, 20197 Pages
From Basel I to Basel III In this section, we will describe the Basel Committee’s approach to financial regulation. The approach is described trough an exposition and analysis of the three Basel frameworks. We are going to explain all three of them, as the preparation of new regulation is build on top of the existing ones. It will therefore also be interesting to see in which direction the Basel Committee has changed the regulation Basel I: As mentioned before G-10 counties established the Basel committee in the aftermath of a monetary and banking crisis in 1974. They wanted to create common regulations for the financial industry. This happens as the largest financial institutions became more global in their operation and their operation…show more content…
It was originally planned by the agreements and the related need to be updated regularly as the industry developed. From 1992 through the introduction and throughout the 90s was Basel I extended and adjusted. Most important was the addition of market risk as a regulatory instrument in 1996 as a result of banks' increasing use of derivatives. The so-called Market Risk Amendment allowed for the first time the banks to use their own internal models to calculate risk exposure. The risk parameters for VaR calculations, which lead to, the market risk was therefore calculated on internal data rather than general market data and the risk weight could be based on internal data and allowed for more inputs. The internal model offered a more nuanced picture of the risk profile, which took better account of the individual bank’s circumstances. Through the internal models the banks could achieve lower capital requirement than the standard models, but the internal models was expensive to set up and maintain, so in praxis only the large banks used them (BCBS, 2009 and Moosa 2010). Figure xx bellows shows an overview of Basel I, in terms of the risks that are incorporated and how banks must calculate them. The framework rests solely on capital requirements for determining the two risk groups as a measure of a bank’s

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