Who is Basel and Why Should I Care

The Basel Committee was created in late 1974 by the international community after the collapse of a large German bank due to liquidity problems. The Basel Committee operates as an arm of the Bank of International Settlements (BIS). The BIS is an organization made up of central banks from around the world and was created in 1930 as part of The Hague Accords. It took until 1988 to get the first Basel accords passed by the G-10 countries. Basel I established international capital suggestions in order to better calculate risk. Basel I was very similar to the net capital rule that was already in place in United States.

Basel II was established in 2004 in order to correct for changes to the financial system that had taken place since the original accords were accepted. Basel II established a series of recommendations that would theoretically reduce risk through oversight by government regulators. Basel II argued, much like the alternative to the net capital rule, which large international banks could take on what are historically riskier assets and more leverage as long as government regulators could judge the broker dealers investments. The current financial crisis has shown that banking regulators have not been able to adequately exercise oversight on these large financial institutions. The use of Value at Risk models (VAR) did not create realistic risk models because they did not take into account the possibility of a catastrophic collapse. Basel II was also similar to the original net capital rule using the concept of haircuts. However Basel II created a tier structure for assets based on quality of risk. Tier 1 being the highest quality and tier 3 and 4 being nearly completely worthless. Even though the Basel accords tried to cap tier 3 and 4 assets they were not able to do so effectively.

Now there is talk about creating a third Basel accord. I have no idea why we think it will work this time. Let each country regulate their own banks. Because if we had followed the Basel accords our banks would be in as bad a shape as England's.