Understanding the Basel Accords: Regulations and Global Impact

Key takeaways

• The Basel Accords are international regulatory frameworks designed to ensure banks hold sufficient capital to absorb unexpected losses and preserve financial stability.
• Basel I (1988) introduced risk-weighted assets and an 8% minimum capital requirement.
• Basel II refined risk measurement and added three pillars: minimum capital, supervisory review, and market discipline.
• Basel III (post‑2008) raised capital and liquidity standards and introduced extra safeguards for systemically important banks.
• The Basel III “Endgame” (proposals published 2023) increases capital requirements for large banks and will be phased in through 2028.

Background

The Basel Accords are developed by the Basel Committee on Banking Supervision (BCBS), a global forum formed to improve banking supervision and stability. The BCBS is based at the Bank for International Settlements (BIS) in Basel, Switzerland, and its standards are adopted, implemented, and enforced by national regulators. Over time the accords evolved in response to changing market conditions and crises to strengthen banks’ resilience.

Basel I — foundation of capital adequacy

Issued in 1988, Basel I introduced the concept of risk‑weighted assets (RWAs) and required internationally active banks to hold capital equal to at least 8% of RWAs. Assets were grouped into risk categories (e.g., 0% to 100%) to reflect differing credit risk. Capital was categorized into:
* Tier 1 — the highest quality capital (core equity and disclosed reserves).
* Tier 2 — supplementary capital (hybrid instruments, loan‑loss reserves).

Example: a bank with $100 million in RWAs needed at least $8 million in qualifying capital.

Basel II — improved risk sensitivity and discipline

Basel II refined the framework by focusing on three pillars:
1. Minimum capital requirements (more risk‑sensitive approaches),
2. Supervisory review of internal risk assessments and capital adequacy,
3. Market discipline through enhanced disclosure.

It allowed more sophisticated methods for measuring credit and operational risks and expanded capital classification (including a tertiary Tier 3 in the original framework to cover certain market risks, later removed under Basel III).

Basel III — strengthening after the 2008 crisis

In response to the 2008 financial crisis, Basel III tightened capital and liquidity standards and addressed shortcomings in governance, risk management, and leverage. Key features include:
* Higher quality capital requirements emphasizing common equity,
* New liquidity requirements to ensure short‑ and longer‑term funding resilience,
* Additional capital surcharges for systemically important banks (those deemed “too big to fail”).

Basel III reforms have been consolidated into the Basel Framework and gradually implemented by member jurisdictions.

Basel III Endgame — finalizing reforms

Published in 2023, the Basel III “Endgame” proposals aim to further raise and recalibrate capital requirements, particularly for large banks. Implementation is being phased in starting around 2025, with full compliance targeted by July 1, 2028. In the U.S., the rules would most affect banks with $100 billion or more in assets (roughly several dozen institutions), while smaller community and regional banks are largely unaffected.

Critics warn the changes could restrain lending, reduce investment in priority areas (such as green projects), and make some banks less competitive. Supporters argue the higher capital buffers reduce the risk of failures and taxpayer-funded bailouts.

Why the Basel Accords matter

The accords set internationally recognized minimum standards that promote a safer, more resilient global banking system. By requiring banks to hold adequate capital and manage liquidity and risk more effectively, Basel standards aim to:
* Reduce the likelihood of bank insolvencies,
* Limit the spread of financial distress across borders,
* Lower the need for government intervention during crises.

Criticisms and limitations

Earlier Basel frameworks (notably Basel I and II) faced criticism for oversimplified risk weights, a narrow focus on credit risk, and insufficient coverage of systemic vulnerabilities—shortcomings that contributed to weaker resilience before the 2007–2009 crisis. Ongoing debates over Basel III reforms center on balancing financial stability against potential effects on credit availability, economic growth, and international competitiveness.

Who created the Basel Accords

The Basel Accords were developed by the Basel Committee on Banking Supervision (BCBS), established by central bank governors and banking supervisors as a cooperative forum to improve bank supervision and financial stability internationally.

Conclusion

The Basel Accords—Basel I, II, and III—represent the international effort to standardize bank capital, risk measurement, and supervisory practices. Each iteration has sought to address gaps exposed by financial stresses and crises. While the accords cannot eliminate all banking risks, they provide a common framework that strengthens individual institutions and the global financial system as a whole.