The BIS and the Basel Rules

Banks in different countries compete globally. If one country let its banks hold very little capital, they could take more risks and undercut others, but a failure could spread worldwide. The Basel accords set common minimum standards.

The Bank for International Settlements

The BIS, founded in 1930 and based in Basel, Switzerland, is often called the central bank for central banks. It:

• Provides banking services to central banks.
• Hosts meetings where central bankers coordinate.
• Conducts research on global finance.
• Hosts the Basel Committee on Banking Supervision, which writes global banking standards.

Basel I (1988)

The first accord required banks to hold capital equal to at least 8 percent of their risk-weighted assets. Riskier loans needed more capital.

Basel II (2004)

Basel II allowed large banks to use their own models to measure risk. Critics later argued this let banks understate risks before 2008.

Basel III (from 2010)

After the 2008 crisis, Basel III strengthened rules:

• Higher and better-quality capital, especially common equity.
• Capital buffers, including a countercyclical buffer to be built in good times.
• Leverage ratio: a simple limit on total borrowing.
• Liquidity rules, requiring banks to hold enough liquid assets to survive a month of stress.
• Extra requirements for systemically important banks.

Implementation of the final parts of Basel III has been slow and uneven across countries.

India

The RBI applies Basel III standards to Indian banks, sometimes with stricter requirements than the global minimum.

Why capital matters

Capital is the owners’ money in a bank, which absorbs losses before depositors are hurt. More capital makes banks safer but can make lending more expensive, a trade-off regulators must balance.