The Basel Framework

This section provides an overview of what the Basel Framework is and how it works.

What is the Basel Framework?

The Basel Framework is “… the full set of standards of the Basel Committee on Banking Supervision (BCBS), which is the primary global standard setter for the prudential regulation of banks”. In addition, “The membership of the BCBS has agreed to fully implement these standards and apply them to the internationally active banks in their jurisdictions”.

These standards are built on the Three Pillars Framework. When first introduced in Basel II in 2004 these covered minimum capital requirements (Pillar 1), supervisory review (Pillar 2) and market discipline (Pillar 3).

Following the financial crisis additional requirements were added on liquidity and leverage which have since been brought within the remit of Pillar 1.

Click here to see further details on the Three Pillars Framework and the 14 standards contained within the Basel Framework that set out Basel requirements covering each of these pillars.

How does the Basel Framework work?

The Basel Framework contains the set of standards approved and issued by the Basel Committee on Banking Supervision (BCBS) for the prudential regulation of banks that BCBS members have agreed to fully implement.

In practice these standards are not the rules and regulations that banks must implement as they must be translated into local regulations at jurisdiction level. In turn banks must develop new and/or updated policies and processes, as well as invest in systems and resources, in order to implement and then demonstrate to the supervisors that they are complying with them.

Click here to find about more about these processes, how regulatory requirements are determined in countries that do not have representation on the BCBS and what issues this gives rise to in both BCBS and non-BCBS jurisdictions.

Technical Appendix

This section includes a series of papers that explain or expand on content that it was not possible to cover in more detail in the book.

A summary of the approaches that can be used for capital calculations - a cornerstone of Basel requirements, dating back to the very first publication in 1988, also known as Basel I, is the capital adequacy ratio (CAR). Click here to find out more details about this. The paper includes a comprehensive summary of the various approaches that can be used to calculate risk weight assets (RWAs), the denominator of the CAR.

What is a risk type?  - Pillar 1 sets out capital adequacy requirements for the main risk types credit, market and operational risk whilst those for other risk types are covered under Pillar 2. The attached paper explains what risk, and sub-risk, types are, how they are differentiated and why.

What is the difference between collateral, security and mitigation? - the terms collateral, security and mitigation, or more specifically credit risk mitigation (CRM), are often used interchangeably but they are not exactly the same. Click here to find out why that is the case and what impact this has.

Further papers to follow.