Basel I refers to a set of international banking rules enacted in 1988 by the Basel

Committee on Bank Supervision.

Basel Is objective was to improve banking stability through strong rules and
supervision during a time of increasing bank failures and bankruptcy risks. It
weighed the capital a bank owned to the credit risk it faced.

Basel I defined the bank capital ratio, which requires banks to maintain a minimum
ratio of total capital to risk-weighted assets of 8 percent.

Basel I outlined two tiers of bank capital. Tier 1, or a banks core capital, includes
issued stock and declared reserves. Tier 2 is a banks supplementary capital,
including gains on investments, long-term debt and hidden reserves.

Basel I also created a bank asset classification system, which grouped a banks
assets into five risk categories.

Basel I was the first combined international effort to assess risk relative to bank
capital. Its calculations proved too simplified in the long run, but it paved the way
for Basel II, which sought improved risk assessment amid ongoing innovation in the
financial industry.
Basel II refers to the second of a set of international banking rules passed by the
Basel Committee on Banking Supervision.

Published in 2004, Basel II focused on strengthening the capital requirements of

banks by establishing three goals:
Make a banks capital more risk sensitive
Promote enhanced risk management tactics among larger banks
Create a common means for evaluating banks from one country to another

Basel II created standards and regulations on the amount of capital financial

institutions must put aside. The risk of all the investments banks make was to be
weighed when determining a banks capital requirements. The greater the risk it
took on, the more capital required in reserve.

Basel II also identified three pillars for evaluating bank performance:

Calculate minimum capital requirements
Identify risk factors not captured in Pillar 1
Assess information pertaining to risk management and distribution

Minimum capital requirements were required to reflect credit risk, which is the credit
rating of the parties to whom the bank loans money. The pillar also reflected market
risk, which focused on a banks other investments. And it considered operational
risk, which weighed non-financial factors like theft or natural disaster.

The 2008 financial crisis struck before Basel II could take full effect. The committee
responded to criticism of Basel II and deficiencies in financial regulation by revising
its standards and publishing Basel III, which was created to strengthen bank capital
requirements and increase liquidity.
Basel III is the third in a series of accords by the Basel Committee on Banking
Supervision, which is a forum for members of the worldwide banking community to
discuss ways they can cooperate on banking supervisory matters. The purpose of
the accords is to improve the worldwide bank regulatory framework.

The accords from Basel I and Basel II produced agreements that help improve the
international banking sectors measurement and management of financial and
economic stress, help banks better measure and manage risk, and improve bank
reporting transparency.

The agreements reached under the Basel III accord are a response to the financial
crisis of 2007-2008. The focus of Basel III is at the individual bank level, with
emphasis on a banks liquidity coverage ratio, net stable funding ratio, the
establishment of liquidity risk management supervision principles, and monitoring

metrics. It is believed these tools will help individual banks better absorb financial
shocks.

Basel III was originally published in 2011 with a 2013 to 2015 phase-in. Adjustments
pushed the implementation dates back to a 2019 start date.