Basel Accords: Comparative Analysis of Basel I, II, and III Directives

This report provides a comparative analysis of the Basel Accords, specifically Basel I, Basel II, and Basel III. It begins by defining operational risk and its management, highlighting the role of the Basel Committee on Banking Supervision (BCBS) in establishing these directives. The report then delves into the core differences between the three accords, including their objectives, risk focus (credit, operational, liquidity), and capital structures. Basel I's emphasis on minimum capital requirements is contrasted with Basel II's introduction of a three-pillar approach and Basel III's focus on liquidity buffers. The analysis also considers the evolution from a backward-looking approach to a forward-looking perspective, and the impact of these accords on the global financial landscape. The report concludes by emphasizing the importance of understanding these directives in managing banking risks, particularly in light of the 2008 financial crisis and increasing globalization. The document provides a comprehensive overview of the evolution and key features of the Basel Accords.

Operational risk the risk of the loss generated from the failed internal processes or the inadequate
and the various systems from the external events. Operational risk is inclusive of legal risk but
excludes the reputational and strategic risks (Walter, 2010). Operational management on the
other side is the risk management for the operational risk that I similar to the risk management
process. The process entails, the assessment, measurement, identification, mitigation, reporting
and monitoring of the risks brought into the play (Pezier, 2002).
Basel accords are those which are introduced by the Basel Committee on Banking Supervision
(BCBS), which is a committee of the banking supervisory authorities which was incorporated by
the central bank governors of the ten group countries in the year 1975. The sole reason was to
provide guidelines for banking regulations. Basel 1, 2 and 3 originate from this committee with
an attempt to enhance banking credibility through extended bank supervision countrywide.
The Basel 1 was brought into place to specify the minimum ratio of capital to the risk weighted
assists for the banks, while the Basel 2 was created to introduce the supervisory responsibilities
and in turn extend the measures to strengthen the minimum capital requirement. The Basel 3 was
put in place to be able to promote the essence for liquidity buffers which an additional layer of
equity (Wahlström, 2009).
The three are completely different from each other based on various aspects when they are
evaluated. The paper shall analyze the differences existing between the 3 Basel directives. From
the initial processing of the Basel, each directive had the sole purpose of the establishment. The
Basel 1 main role was of enumeration of a minimum capital requirement for the banks within
their jurisdiction. The Basel 2 was put in place to bring into the game the responsibilities of
supervision and extend the minimum capital requirement introduced by the Basel 1. On the other

hand, Basel 3 was brought to being to specify the additional buffer of equity to be upheld by the
banks (Lam, 2013).
Regarding the risks regarding the other Basel’s, Basel 1 remains to be the minimal risk focus as
compared to the other Basel. At Basel 2 is when a 3 pillar approach to the management of risk
was introduced. And to deal with more risks escalating an assessment of liquefying risk was
introduced among the other risks that had been introduced (Belluz, et al, 2010).
The Basel did not so much become similar to the risks they regarded while implementing the
same. The general risk was credit risk that was considered at the Basel 1. In the Basel 2, various
risks were put under scrutinizes such as the reputational, operation and the strategic risks which
would affect the banks. Basel 3 was not more of a new face in the directive issued since the only
risk that was added to the list was the liquidity risks for the business at the time (Pezier, 2002).
As compared to the other Basel’s, Basel 1 is backward-looking since it only considered those
assets which were in the current portfolio of the banks at the moment. Basel 2 was contrary of
the Basel 1 as it was forward-looking as it was capital risk sensitive. The Basel 3’s future risks
predictability is forward-looking as the macroeconomic environment factors are put in place in
the addition of the individual bank criteria (Moosa, 2007).
Another common difference is also the capital structure. The Basel 1 is defined as the regulatory
capital which implies for the uniformity for all, while Basel 2 is all about the risk-weighted
capital as compared to Basel 3 which dealt with the cyclical capital to ensure the cyclic and the
variations in the market (Chapelle, et al, 2004).
The variation between Basel 1, 2 and 3 accords is the variation in the objective in which they are
established to enshrine. However, they are navigated to manage banking risks in light swiftly

affecting the global business environ, although they are different in requirement and standards.
With the continued advancements in business integrations and globalization, the banks are
interrelated across the globe. And in the event the banks take uncalculated risk, very disastrous
situations may arise of the massive amount of funds that are involved and the negative impact
can be dispersed in various nations. Such financial crisis began in the year 2008 which caused a
very substantial economic loss is a good example (Chernobai, et al, 2008).

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