From Basel 1 to Basel 3: The Integration of State-of-the-Art by Laurent Balthazar

By Laurent Balthazar

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GOALS OF THE ACCORD It is instructive to look at the three stated Committee objectives: To increase the quality and the stability of the international banking system. 39 40 DESCRIPTION OF BASEL 2 To create and maintain a level playing field for internationally active banks. To promote the adoption of more stringent practices in the risk management field. The first two goals are those that were at the heart of the 1988 Accord. The last is new, and is said by the Committee itself to be the most important.

The regulatory capital is the maximum cumulative loss on ten trading days at the 99th percentile one-tailed confidence level multiplied by a factor of 3 or 4 (at national discretion, depending on the quality of the model and of the back-testing results). Banks’ datasets should be updated not less frequently than every three months. Banks will be allowed to use correlations within broad risk categories (interest rate, exchange rate, equity prices, commodity prices …). Banks’ models must capture the unique risks associated with options (non-linear risks).

There were also several nationalizations. The roots of the crisis were economic weakness, poor management, and inadequate regulation. 1984 The Continental Illinois failure – the biggest banking failure in American history. With its 40 billion USD of assets, Continental Illinois was the seventh largest US commercial bank. It had been rather a conservative bank, but in the 1970s the management decided to implement an aggressive growth strategy in order to become Number One in the country for commercial lending.

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