Evolution of the Basel Framework on Bank Capital Regulation

This paper covers the major developments in the efforts towards harmonisation of bank capital standards by the Basel Committee on Banking Supervision (BCBS) viz., the Basel Accord of 1988, the 1996 amendment to the Basel Accord, the Basel II framework and the subsequent refinements. Though capital regulation in banking had existed in some form or the other even before the signing of Basel Accord in 1988, the Accord marked a watershed in the efforts towards harmonisation of bank capital regulation across nations. More than 100 countries adopted the Basel I regulatory requirement of capital at eight per cent of risk-weighted assets. The high pace of financial innovations, however, brought into light the deficiencies of Basel I framework and the need for a more flexible and more risk-sensitive capital standards. After years of intense consultations and modifications, the revised capital framework, popularly known as Basel II was released by the BCBS in June 2004. While the implementation of Basel II is in progress in several countries across the globe, soundness and stability of the international banking has been severely challenged by the outbreak of the sub-prime crisis in the US mortgage market in 2007. The crisis has spread across sectors and across nations without showing any signs of abatement, and by