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If
you read banking or financial news, you’ve probably seen references
to the “Basel Committee” (sometimes spelled “Basle”).
You may not know what the Basel Committee is, unless you work for an international
bank. What follows is a brief introduction to the Committee and its work.
Background
The Basel Committee
on Banking Supervision (BC or the Committee) is made up of representatives
from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands,
Spain, Sweden, Switzerland, United Kingdom, and the United States. The
BC was established in 1974 to promote the supervision of internationally
active banks.
In 1988, the Committee
published the document for which it is best known. The document was titled
“International Convergence of Capital Measurement and Capital Standards,”
but became commonly known as the Basel Capital Accord (BCA). The 1988
BCA represented the agreement of its members on issues such as how capital
is calculated, how the risks against which capital is held are evaluated,
what the ratio of capital to risk should be, and a timetable during which
international banks could progress toward meeting that ratio. The standards
were designed to promote the stability of international banks and encourage
competitive equality among them with respect to the capital obligations
they must meet.
The BCA is merely
an agreement of the BC’s members. It does not have the force of
law. The Committee expected that the various member nations—and
even some nonmember nations—would implement the standards through
legislation or regulation, and many have.
Developments
Since 1988, the BC
has issued a number of amendments to and interpretations of the BCA. For
example, in November of 1991, the BC issued an amendment clarifying that
loan-loss reserves counted as capital only if they were not held against
identified problem assets. In April of 1993, the Committee issued an analysis
of interest rate risk. In July of 1994, the BC issued an amendment dealing
with the credit risk of off-balance sheet items, and an amendment relating
to which countries would be used to create certain types of risk weighting.
In April of 1995, the BC issued another amendment dealing with off-balance
sheet items. And in January of 1996, the Committee issued an amendment
to take market risks into account in capital requirements.
Basel
II
In January of 2001,
the BC issued a proposal to fundamentally change the BCA. Known as the
“New Basel Capital Accord,” or “Basel II,” the
proposal has been the topic of discussion up to the present.
First, Basel II would
introduce flexibility by allowing a bank to select from various options
a capital structure that matches the complexity of the bank’s operations.
Second, Basel II includes new procedures under which supervisory agencies
would review a bank’s internal processes for the purpose of insuring
that capital and risks are properly evaluated and structured. And third,
the new Accord would require disclosure of capital and risk status for
the benefit of market participants.
Post
Basel II
Since introducing
Basel II, the BC has been accepting comments and issuing statements about
the proposal. The latest word is that the Committee intends to complete
work on the amendments by mid-year 2004. Proposed implementation would
take until the end of 2006 for member countries.
Know-Your-Customer
Over the years, the
BC has also concerned itself with issues in addition to capital requirements.
Among these is “Know Your Customer” (KYC). In October of 2001,
the Committee issued “Customer Due Diligence for Banks,” which
outlined the approach the Committee recommended nations take in encouraging
banks to know their customers. In October of 2003, the BC issued “Consolidated
KYC Risk Management,” which emphasized the importance of KYC programs
being coordinated at a high enough level in an organization to ensure
that the program will be consistently implemented throughout all the organization’s
branches and institutions in all countries.
Anti-Money
Laundering
Another issue with
which the Committee has been concerned is anti-money laundering. In June
of 2003, the Committee participated in a joint issuance, along with international
associations of insurance supervisors and securities commissioners. The
joint issuance was a statement of what each of the three sectors—banking,
insurance, and securities—has done and should do in the future to
deter money laundering and combat the financing of terrorism.
More
Information
For more detailed
information, as well as the actual Committee documents, press releases,
interpretations, etc., go to the web site for the “Bank for International
Settlements,” www.bis.org
and click on “Basel Committee.”
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