Finance - BIS Capital Adequacy Essay Example | Topics and Well Written Essays - 500 words

Finance - BIS Capital Adequacy - Essay ExampleAmong its more important committees is the Basel Committee which is responsible for the promulgation of banking regulation guidelines concerning supervisory issues. In this regard, Basel I (1988 Accord) was a landmark in the banking industry in that banks having an supranational presence are required to hold as a minimum 8% of their neat equal to the risk weighted assets (there are five risk weightings). Basel II, which came in June 2004, addressed some of the weaknesses from Basel I. Both accords, however, are designed to strengthen the financial banking administration by requiring a more rigorous set of capital requirements for banks to meet their credit and capital risks. Furthermore, Basel II is more forward-looking by requiring banks to identify those risks immediately and in the future especially with the sudden surge in hedge funds and esoteric investment instruments such as credit default swaps and separate derivatives. Basel II attempts to avoid systemic risks such as what happened in the US subprime mortgage crisis which engulfed the entire banking system with spectacular collapses such as AIG.Basel II is as well as more comprehensive by requiring banks to maintain enough capital to certain risks by quantifying credit and operational risks. A bank that engages in more big investments is required to maintain a higher capital adequacy ratio to remain solvent in case of a crisis. Other considerations are a banks residual risks and the mandatory disclosures to comply with international accounting rules and standards. This last provision is crucial as it gives counter-parties an idea of the risks they face when dealing with a certain international bank. This way, there are no ticking time bombs like CDS which Mr. Warren Buffett likens to weapons of mass destruction (Graham & Dodd 2008, p. 622) due to unregulated credit default swaps that