Managing Bank Capital: Capital Allocation and Performance Measurement, 2nd Edition

7

The Basel Accord

This chapter gives a more detailed account of the Basel Accord framework and its workings. It combines all of the amendments into a single analysis, providing a summary for the reader of the current status of the Accord. It is up to date as of December 1999. It does not assume any prior knowledge of the Basel Accord framework by the reader (although it will be helpful to have read Chapter 6 first).

This chapter will cover the definition of capital and the instruments eligible to be counted (including hybrid capital instruments), a discussion of the treatment of on and off-balance-sheet positions, and a review of the rules for calculating market risk.

CHRONOLOGY OF THE BASEL ACCORD AND RELATED AMENDMENTS

The Basel Accord was published in July 1988, with the aim of being converted into national regulations “as soon as possible”. As many banks were undercapitalised relative to the Accord at the time (see Table 1.1 on page 13), a goal was established of meeting a 7.25% minimum capital level by the end of 1990, and the full 8% minimum by the end of 1992.

There have since been five amendments to the Accord, four of which modified or expanded the original framework, and the fifth related to the introduction of a market risk capital charge.

The key documents are as follows. These are all available either from the publications office of the BIS (in Basel, Switzerland) or directly from the BIS website (www.bis.org).

• July 1988: “International convergence of capital measurement ...