Over the years, and through various crises, the Basel Committee of Banking Supervision (BCBS) introduced capital requirements for the banks. Basel I had standardised capital requirements (Standardised Approach). That is, for every $100, the bank sets aside $8 in capital. Banks do not have to put aside the entire $8 (8%), If the loan carries a 90% risk weight, the bank puts aside $7.20.
The transition period to Basel IV starts in July and will take place over five years.
The Basel framework is a set of measures developed to strengthen the regulation and risk management of banks. To minimise the fears of banks that loans will not be repaid (this is termed credit risk), regulators have imposed capital buffers. When loans go south, this capital buffer is meant to absorb the shock. If all the capital is used to absorb the shock, the bank collapses, which was the case in 2008. More recently, Credit Suisse’s additional tier 1 capital (AT1) was used to absorb the shock.
