Transition from BASEL I to BASEL III: A Critical Review

Basel Accords are a set of standards and practices developed for global banks to ensure that they maintain adequate capital to withstand periods of economic strain. It is a comprehensive set of reform measures designed to improve the regulation, disclosures and risk management within the banking sector. Basel Accord I was introduced in 1988 by the Basel Committee on Banking Supervision (BCBS) under the auspices of Bank for International Settlements (BIS) and focused almost entirely on credit risk. It defined capital requirement and structure of risk weights for banks. Basel Accord II was introduced in 2004 to address the loopholes of Basel I and laid down guidelines for capital adequacy, risk management and disclosure requirements. The question arises as to why Basel Accord III? It is widely felt that the shortcomings of Basel II led to the global financial crisis of 2008. That is because Basel II did not have any explicit regulation on the debt that banks could take on their books, and focused more on individual financial institutions, while ignoring systemic risk. To ensure that banks don’t take on excessive debt, and that they don’t rely too much on short term funds, Basel III was proposed in 2010. Through this research paper, I intend to critically analyse the three tiers of banking regulatory reforms namely, Basel I, Basel II and the Basel III and the loopholes of each of the preceding Basel Accords which has given way to the next. An insight into the Indian banking sector with respect to these Accords shall also be given. A case study of the State Bank of India regarding its current position as per Basel II and the necessary shift to Basel III is formulated and explicated here.