Summary

The 1988 Basel Capital Accord, which sets standardised capital requirements for G10 banks and is regarded as the cornerstone of the global financial system, is currently under review. As anticipated in the Commission's Financial Services Action Plan, changes to the European Directives on Solvency will be necessary to implement the new G10 standards in the EU. The Basel Committee on Banking Supervision released a consultation paper in June 1999 and a Commission consultation paper was issued in November 1999.

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Background

The Basel Committee on Banking Supervision was set up in the 1970s to improve the standards of the international banking system and to minimise the chances of a systemic financial crisis. Comprised of the central banks and banking supervisors of the G10 countries (France, Germany, Italy, Switzerland, the Netherlands, Belgium, Sweden, the UK, the US, Canada and Japan) and Luxembourg and based at the BIS in Basel, the Committee published an Accord in 1988 which required internationally active banks to hold minimum capital of 8% of risk weighted assets as a cushion to protect them against counterparty and (implicitly) other risks (see www.bis.org). The Accord set five categories of risk weights (0%, 10%, 20%, 50% and 100% per cent). Broadly speaking, a credit exposure to an OECD sovereign is 0% weighted because these sovereigns are unlikely to default, and no capital is required. But a loan to a private company would be 100% weighted, meaning that a bank would have to hold 8 Euro in capital for every 100 Euro of exposure.