New Basel Capital Accord

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GERMAN INVESTMENT FUNDSBasel as the Forerunner of Supervisory HarmonizationWhen the Basel Committee was establishedin 1974 by the central bankGovernors of the Group of Ten countries1 and Luxembourg under the nameof "Committee on Banking Regulationsand Supervisory Practices", there wasneither a comparable internationalbanking supervisory body at individualinstitute level nor group-wide regulationfor banking groups. Apart fromthe First Banking Law CoordinationDirective from the European Union, allother EU directives on the harmonizationof banking supervision were notpassed until the 1980s and 1990s.The work of the Committee whose meetingsare usually held at the Bank forInternational Settlements (BIS) focuseson two major objectives: firstly, tocreate a framework to strengthen thesoundness and stability of the internationalbanking system. Secondly, tomake that framework fair and consistentin its application to banks in differentcountries in order to reduce the distortionof competition between internationalbanks.In order to realize these objectives,which are welcomed by the bankingindustry on the whole, the Committeein Basel and the authorities of the EuropeanUnion (EU) in Brussels conferredclosely on later work in order to harmonizeas far as possible the rules agreedin Basel and the plans of the EU.Nevertheless the current Basel rules andthe EU rules implemented in Germanyin Principle I still differ in a number ofrespects. For example, commercial mortgageloans or securities backed by mortgagesare currently still recognized 100%in the BIS capital ratio whereas PrincipleI allows reduced risk-weighting of50%.NorthAmericaEuropeAsiaAmong the supervisors from the individualcountries on the Basel Committee,the Federal Republic of Germany isrepresented by both the GermanFederal Central Bank (Bundesbank)and the Federal Financial SupervisoryAgency (BAFin).SouthAmericaAfrica1US, Canada, Germany, France, United Kingdom,Italy, Japan, Netherlands, Sweden, Belgium,Switzerland.6ERNST & YOUNG – NEW BASEL CAPITAL ACCORD
Basel Milestones1974Basel as the Forerunner ofConsolidated Supervision1975Basel Concordat on theCooperation of Regulators1988Basel Capital Accord(Basel I)The original task of the Basel Committee on Banking Supervision which was foundedin 1974, was the formulation of principles which would close gaps in thesupervision of international banking groups. The concept of ConsolidatedSupervision, which is still the sole basis of the Basel recommendations today, wasnew at the time. Up until the 1980s the German Banking Act (KWG) was limitedto supervision of individual banks, while consolidated supervision was notintroduced until the Third KWG Amendment in 1984, a decade after Basel.The first visible result of the Committee’s work was the Basel Concordat of 1975regulating international cooperation between supervisory authorities. The aimof this recommendation, which was revised in 1983, is the comprehensive, crossbordersupervision of banks both in their country of origin and in all of theirforeign branches.The "Minimum Requirements for Capital Adequacy of Internationally ActiveBanks" agreed in 1988 have proved to be the most significant milestone so far.Initially intended for internationally active banks in the Group of Ten countries,the widespread acceptance of this norm led to it gradually becoming the recognizedstandard in over 100 countries.Above all, this recommendation now referred to as "Basel I" set important internationalstandards in three ways: firstly, despite hefty differences of opinion, therecognition of the constituents of capital was largely harmonized – since thencapital has been sub-divided into core capital (Tier 1) and supplementary capital(Tier 2). Secondly, risk rates for exposures were set. The framework of weightsis considered to be too broad by today’s standards and is the main reason for theamendment; the framework was also methodically limited by data processing andrisk measurement capabilities available at the time. Thirdly, the important minimumratios for Tier 1 capital (4% of weighted exposures) and total capital (8%of weighted exposures) were set. These ratios are also frequently known as theBIS Tier 1 Capital Ratio or the BIS Capital Ratio after the seat of the BaselCommittee at the Bank for International Settlements (BIS).ERNST & YOUNG – NEW BASEL CAPITAL ACCORD7
Page 1 and 2: G LOBAL F INANCIAL S ERVICESB USINE
Page 3 and 4: Table of ContentsPageThe Effects of
Page 5: THE EFFECTS OF THE NEW BASEL CAPITA
Page 9 and 10: BASEL MILESTONESJanuary 2001/May 20
Page 11 and 12: Effects of the New Basel Capital Ac
Page 13 and 14: The Conceptual Environment of Risk-
Page 15 and 16: SPECIFIC CAPITAL TREATMENT OF CREDI
Page 17 and 18: SEPARATE QUANTIFICATION OF OPERATIO
Page 19 and 20: REQUIREMENTS ON RISK MANAGEMENT FRO
Page 21 and 22: Bibliography - Selected Current Lit
Page 24: ERNST & YOUNG AGWIRTSCHAFTSPRÜFUNG

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