BASEL I, II AND III

The terms Basel I, II and III are part of the Basel Accords set by the Basel Committee on Banking Supervision for equity and follow a historic order. In this sequence, the objectives and consequences of the regulatory frameworks and measures can be better understood.

The main challenge: Banks want to and have to provide loans. At the same time they have to be able to maintain their own ability to meet financial obligations and compensate for possible losses. Appropriate equity can be a means to compensate for this challenge.

IMPACT OF BASEL III ON THE GERMAN BANK SECTOR

Source: empirica; CBRE Group

BASEL I

In 1988 the Basel Committee on Banking Supervision (BCBS) first passed a set of international regulatory rules and guidelines in order to regulate the banks’ capital requirements. After the unprecedented insolvency of the Herstatt Bank and the fear that the equity of banks had decreased to a threatening level, banks were forced to reduce the risk weighting by setting a uniform framework.

An equity ratio of 8% was set in regards to the risk-weighted assets. This ruling has become a general banking standard, even though it was initially intended for international banks. The BaFin as well as the EU have adopted Basel I as a general benchmark for financial decisions.

BASEL II

In 2004 a subsequent reform focussing on the regulations of the capital ratio of banks was adopted in order to create uniform conditions for the international competition on the financial markets. Emerging risks were to be assessed better. In addition, risk weighting of debtors were to be adjusted more flexibly: The more risky a credit transaction, the higher the bank’s own capital investment should be. Since the beginning of 2007, Basel II has been binding for credit institutions.

Basel II includes three pillars of measures that complement each other:

  • Minimum capital requirements
  • Assessment of the banking supervision
  • Extended disclosure or market discipline of banks

BASEL III

In 2010 the managers of the central banks and supervisory authorities of the strongest financial countries established new regulations for capital equity in order to prevent further bank bailouts and to strengthen the financial systems after the financial crisis of 2007.

During the course of Basel III, the core capital ratio of the banks has been increased: Core capital is the component of equity, which has a particularly secure value and is therefore more likely to be accessible in emergencies. This ratio has been increased from 4 to 6%, while the total equity ratio of 8% will stay in place. Furthermore, other buffers have been defined to provide additional security.

EQUITY BASED CROWDFUNDING

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