The New Basel Capital Accord: an explanatory note

by Secretariat of the Basel Committee on Banking Supervision

January 2001

Introduction: More than a decade has passed since the Basel Committee on Banking Supervision (the Committee) introduced its 1988 Capital Accord (the Accord). The business of banking, risk management practices, supervisory approaches, and financial markets each have undergone significant transformation since then. In June 1999 the Committee released a proposal to replace the 1988 Accord with a more risk-sensitive framework, on which more than 200 comments were received. Reflecting those comments and the results of ongoing dialogue with the industry and supervisors worldwide, the Committee is now presenting a more concrete proposal, seeking comments from interested parties by 31 May 2001. The Committee expects the final version of the new Accord to be published around the end of 2001 and to be implemented in 2004.

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The New Basel Capital Accord

by the Basel Committee on Banking Supervision

January 2001

Introduction:

1. The New Basel Capital Accord (the New Accord) will be applied on a consolidated basis to internationally active banks. This is the best means to preserve the integrity of capital in banks with subsidiaries by eliminating double gearing.
2. The scope of application of the Accord will be extended to include, on a fully consolidated basis, holding companies that are parents of banking groups to ensure that it captures risks within the whole banking group. 1 Banking groups are groups that engage predominantly in banking activities and, in some countries, a banking group may be registered as a bank.
3. The Accord will also apply to all internationally active banks at every tier within a banking group, also on a fully consolidated basis (see illustrative chart at the end of this section). 2 A three-year transitional period for applying full sub-consolidation will be provided for those countries where this is not currently a requirement.
4. Further, as one of the principal objectives of supervision is the protection of depositors, it is essential to ensure that capital recognised in capital adequacy measures is readily available for those depositors. Accordingly, supervisors should test that individual banks are adequately capitalised on a stand-alone basis.

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