Basel I focuses primarily on credit risk management, establishing the first set of international banking regulations to ensure financial stability and minimize risks in the banking sector.
Basel I refers to the first Basel Accord, formulated by the Basel Committee on Banking Supervision (BCBS) in 1988. Its primary objective is to enhance the stability of the international banking system by establishing standardized regulations focused on credit risk.
To ensure a level playing field among international banks and reduce the risk of financial crises, Basel I introduced the concept of minimum capital requirements, strengthening the resilience of banks in the face of financial challenges.
Credit risk is the risk of loss due to a borrower’s failure to make payments as agreed. Basel I brought a standardized approach to measuring credit risk, which banks must uphold to maintain solvency and protect depositors.
Basel I introduced the Capital Adequacy Ratio (CAR), calculated as follows:
Where:
Banks were required to maintain a minimum CAR of 8%.
Basel I assigned different risk weights to various asset classes:
Basel I was implemented in member countries in the early 1990s, achieving its goal of harmonizing international bank standards and making banks more resilient to financial shocks.
While Basel I focused mainly on credit risk, Basel II expanded to include market and operational risks with a more complex framework, introducing the three-pillar approach:
Basel III, developed in response to the 2008 financial crisis, significantly strengthened regulatory standards with higher and more resilient capital buffers, liquidity requirements, and leverage ratios.