The 1980s marked a major turning point in international banking regulation. Faced with the deterioration of capital ratios of the main international banks and the worsening of cross -border risks, the Basel Committee develops the first international bank fund. This framework, known as Basel I or Basel Agreement on equity, lays the basics of modern banking supervision.
Basel I context: an international coordination need
The Latin American debt crisis as a revealer
In the early 1980s, the Latin American debt crisis revealed the Fragility of the International Banking System. The main international banks see their capital ratios deteriorate precisely when international risks are increasing. This situation alerts the Basel Committee on the need to establish common standards To preserve the stability of the global financial system.
The imperative of regulatory convergence
The members of the Committee, supported by the governors of the central banks of the G10, identify two priority objectives: Stop erosion of capital standards in their banking systems and work towards a plus grande convergence to the extent of the adequacy of equity. This approach also aims to eliminate competitive inequalities resulting from the differences between national capital requirements.
The Basel Agreement of 1988: a weighted approach to risk
The 8 % ratio: a universal floor
The committee reaches a large consensus on a weighted approach to measure the risksboth by the balance sheet and in the out-of the banks. This methodology represents a major innovation, because it takes into account the differentiated nature of risks according to the types of assets held by banking establishments.
The 1988 Basel Agreement thus established a Minimum equity ratio On weighted risk assets of 8%, to be implemented before the end of 1992. This ratio, known as the Cooke ratio, constitutes the first binding international standard in terms of banking solvency.
The principle is simple: the assets are weighted according to their level of credit risk (0% for OECD countries state loans, 20% for interbank loans, 50% for mortgage loans, 100% for other assets), and equity must represent at least 8% of these weighted assets.
The credit risk is the risk that a borrower does not reimburse his debts or his obligations according to the agreed terms.
Ratio Bâle I / Cooke : Credit risk equity / assets ≥ 8%
If the bank grants a loan to a company for a total amount of 100 million euros, it must have a minimum of 8 million euros in equity to respect the Basel I standard. On the other hand, if it lends the same amount to a local community (a French region, for example), its commitment will be 100 million × 20 %, or 20 million, and it will only have to have 1.6 million equity (8 % of 20 million). If the same loan is granted to an OECD state (like France), the bank does not need to put equity with this commitment, since the risk of failure is considered zero.
Published after consultation in December 1987, the agreement on equity was approved by the governors of the G10 and communicated to the banks in July 1988, for an implementation before the end of 1992.
Global adoption exceeding expectations
Initially designed for member countries, This regulatory framework is finally adopted in almost all countries with internationally active banks. In September 1993, the Committee confirmed that banks in G10 countries with significant international banking activity comply with the minimum requirements of the agreement.
The evolution of Basel I: adaptation to new challenges
Successive amendments
The agreement was designed to evolve over time. Several amendments specify and enrich it.
- November 1991 : more precise definition of general provisions that can be included in the calculation of the adequacy of equity.
- Avril 1995 : Taking into account the effects of bilateral compensation for credit exhibitions on derivatives.
- Avril 1996 : extension to the effects of multilateral compensation.
Market risks: a methodological revolution
In 1995, the Barings bank was lacking (following catastrophic investments in derivatives on shares), and showed the insufficiencies of the Cooke ratio. In January 1996, after two advisory processes, the Committee published the amendment on market risksworkforce at the end of 1997. This major extension incorporates a capital requirement for market risks resulting from the exhibitions of foreign exchange banks, negotiated debt titles, shares, raw materials and options.
The most innovative aspect of this amendment is the authorization, for the first time, to use internal models (Value-At-Risk models) as a basis for measuring capital requirements for market risk, subject to strict quantitative and qualitative standards. This possibility marks the beginning of a more flexible and sophisticated approach to the measurement of banking risks.
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The inheritance of Basel I
Basel I establishes fundamental principles of modern prudential regulation : the risk approach, the international harmonization of standards, and the balance between system security and competitive efficiency. However, its main focus on credit risk and its relatively simple weighting grid will show their boundary Faced with the growing complexity of banking activities.
Innovations introduced by market risks amendment, in particular the use of internal models, prefigure future developments in banking regulation. They open the way to more sophisticated approaches that will characterize Basel II, allowing banks to use their own risk measurement methodologies under regulatory supervision.
