Basel I

Bailea I is the first of the agreements issued by the Basel Committee I and was published in 1988 . It was based on various recommendations or  suggestions in order to set a limit on the issuance of credits that an entity grants based on the capital it has. It was established that the minimum capital should be at least 8% of the assets weighted by their risk (credit, market and exchange rate added).   

The most important banking recommendation was to limit the leverage or the multiplicative effect of the investment of financial institutions by 12.5 times the value of own resources  in their balance sheets . This limit was important at that time, since financial institutions have historically been very leveraged, raising people’s funds and granting loans without taking into account risk parameters in case of insolvency of a person or a company.

The definition of regulatory capital was divided into two categories called Tier I and Tier II, depending on whether they met certain requirements in terms of the ability to absorb losses, as well as their permanence and protection against bankruptcy. The main element to take into account was credit risk, it  was calculated by combining risk exposures in 5 different divisions and assigning a percentage of risk to each of them, for example 0%, 10%, 20%, etc. The sum of each of the weighted assets resulted in the risk assets.

This agreement was a very important milestone for the robustness of the banking systems entering, in force in more than 120 countries, but still contained some deficiencies in its formulation, which is why Basel II was proposed in 2004 .

 

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