The Committee on Banking Regulations and Supervisory Practices (Basel Committee) was established in 1974. The Committee was comprised of the central bank Governors of the Group of Ten countries. These countries in particular are Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States. The repercussions of the turmoil in markets and international currency created the need for this congregation. The Basel Committee was tasked to oversee and supervise financial institutions and to issue recommendations and standards on banking laws and regulations. It serves as the forum for cooperation on sound banking practices for member countries.
In 1988, the Basel Committee gave birth to Basel Capital Accord, or the 1988 Accord. The 1988 Accord was to serve as the international standard to be followed by financial institutions. This has come to be known as a stabilising instrument in banking institutions that foster cooperation among participating countries. The aim of the 1988 Accord was to give a new framework that will strengthen the stability of the banking system and to make sure that the framework will be fair and consistent in application to various banks to reduce inequality among international banks. It provided a system for capital measurement and stated the minimum requirements for international banking business. The most significant aspect of the 1988 Accord is the provision imposing a regulatory capital requirement. It required the minimum capital-to-asset ratio of financial institutions to equal to at least eight percent (8%) of the risk-weighted assets. Thus, if all of the institutions assets are exposed to 100% risk, then its capital at hand must be valued at least 8% of its assets. The changes in the 1988 Accord were proposed in 1999. The proposal aims to formulate a capital framework that has evolved to the needs of the time. Thus, the International Convergence of Capital Measurement and Capital Standards: A Revised Framework or the Basel II Accord came upon in June 2004.
Core Principles for Effective Banking Supervision
A remarkable benchmark was made through the Core Principles for Effective Banking Supervisions or the Basel Core Principles. The Basel Core Principles aim to respond to the weaknesses in the banking systems that can threaten countries, regions and even the international community. This document was issued on September 1997 after examinations and studies made by the Basle Committee, the Bank for International Settlements, the World Bank and the International Monetary Fund. Compared to the 1988 Accord, many developing countries participated in the drafting of the Basel Core Principles, like Chile, Thailand, China, Argentina, Brazil and India among others.
The Basel Core Principles are made of 25 basic Principles that are supposed to guide the regulatory or public authorities in the countries into implementing or maintaining an effective financial system. These 25 basic Principles are classified into seven sections. Principle 1 deals with the Preconditions for Effective Banking Supervision. Principles 2 to 5 discuss the Licensing and Structure. Principles 6 to 15 break down the Prudential Regulations and Requirements that are suppose