Page 39 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.79, # 2, 2022, pp. 37-50

Capital requirements established in the context of the Basel Committee led to the
development of stronger competition in banking. The development of the capital
adequacy criterion ensures that banks are not exposed to more risks. In addition, this
rulemaking ensures ease of liquidity (Basel Committee on Banking Supervision,
2006).

Beginning in 2007, Basel II standards became mandatory for banks in European
Union (EU) countries (Augurzky et al., 2004). In the following years, a newer version
of the Basel III standards was developed and presented to market users.

The main purpose of this study is to examine the Basel standards, which have such an
important share in the banking sector. By applying Basel standards to the banking
system, it is to define how banks guarantee themselves and minimize their risks.

BASEL I STANDARDS CREDIT RISK IN THE BANKING SYSTEM
Members of the Basel Committee on Banking Supervision, established in 1974 and
operating under the Bank for International Settlements (BIS)2, in order to facilitate the
understanding of important issues related to banking supervision and to improve the
quality of banking supervision worldwide, are members of Belgium, Canada, France,
Germany, Italy, Japan, Luxembourg, the Netherlands, It consists of officials from central
banks and banking supervisors of 13 countries, including Spain, Sweden, Switzerland,
the UK and the USA. The Committee published the Capital Adequacy Accord, called
Basel-1, in 1988 in order to harmonize the national capital adequacy calculation methods
and to establish a minimum standard in this regard (Arslan 2007).

The Basel Committee was created in 1974 in response to the collapse of a European-
based bank. This event prompted the G-10 countries to establish the Basel Committee
on Banking Supervision (BCBS) under the guidance and supervision of the
International Monetary Bank. The committee is located in Basel, Switzerland. As a
result of the bank's liquidation, this committee initiated the Basel I Treaty in 1988
(IBM, 2018).

The creation of the Basel I Agreement was not simply created, it was created as a
result of meetings and consultations of central bank governors around the world. Basel
I resulted in the issuance of a set of minimum capital requirements for banks. The
agreement, also known as the Basel Accords of 1988, came into force in 1992 in ten
(G-10) countries. Basel I mainly focuses on Credit Risk and Risk Weighted Assets
(RWA). For risk balancing, the classification was made under the condition that the
capital of banks with international presence is equal to 8% of the capital amount
(Blum, 2008).

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