In July 1988, the central bank governors of the Group of Ten Countries and Luxembourg approved a document entitled “International Convergence of Capital Measurement and Capital Standards” which is the culmination of the Banking Regulations and Supervisory Practices Committee`s efforts in recent years to ensure the international convergence of prudential rules on the adequacy of international banks` capital adequacy. This agreement (hereafter the Basel Agreement of July 1988) is another step in the development of a framework for international cooperation in banking supervision. Important steps in the process included the Basel Agreements of 1975 and 1983, which defined the principles governing the distribution of supervisory tasks between the parent and host authorities through branches, subsidiaries and joint ventures in the international banking sector, and the exchange of information between these authorities. Tier 1 capital ratio – Tier 1 capital / all RWAAs This document is the initial text of the so-called Basel-Capital Agreement, which establishes the agreement between G10 central banks to apply common minimum capital standards to their banking industry, which must be reached by the end of 1992. The standards are aimed almost exclusively at credit risk, the main risk for banks. Starting in 1988, this framework was gradually introduced in the G-10 member countries, which include 13 countries from 2013[update]: Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States of America. Basel I is the round of consultations with central bankers around the world and, in 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, issued a series of minimum capital requirements for banks. It is also called the 1988 Basel Agreement and the 1992 Group of Ten (G10) Act. Subsequently, a new regulatory framework, called Basel II, was developed to take over the Basel I agreements. However, some have criticized the fact that they allow banks to take additional risks, which was considered to be part of the cause of the subprime financial crisis that began in 2008.
Indeed, in the United States, the supervisory authorities of the banks have defended the position of requiring a bank to comply with the rules (Basel I or Basel II), which corresponds to the bank`s more conservative approach. For this reason, only the few largest U.S. banks were expected to operate under Basel II rules, with the rest regulated under Basel I. Basel III was developed in response to the financial crisis; it does not replace Basel I or II [necessary clarification], but focuses on several issues related primarily to the risk of a bank run. [Citation required] The document consists of two main sections: (a) the definition of capital and b) the structure of risk weights. Two shorter sections define the target reference ratio and the transition and implementation modalities. There are four technical annexes for capital definition, counterparty risk weights, credit conversion factors for off-balance sheet items and transitional arrangements.