# Basel III ## Metadata * Author: [Carl Olsson](https://www.amazon.comundefined) * ASIN: B0B5M2RZ1B * ISBN: 1800310625 * Reference: https://www.amazon.com/dp/B0B5M2RZ1B * [Kindle link](kindle://book?action=open&asin=B0B5M2RZ1B) ## Highlights The amendment allowed banks to calculate capital requirements for market risk exposures using a supervisory determined standardised approach (SA) or an internal models approach (IMA) developed by the banks themselves. In practice, only the most sophisticated banks had sufficient resources, and data, to develop, and obtain approval to use, internal models for capital calculations. Even then banks that obtained such approval needed to use the SA to calculate capital for the market risk exposures that it was uneconomic or not feasible to develop models for. — location: [1000](kindle://book?action=open&asin=B0B5M2RZ1B&location=1000) ^ref-46347 How did these modes work and how did they affect bank balance sheet composition? --- The risk buckets were too crude – there were only four broad risk buckets, with risk weights of 0%, 20%, 50% and 100%, that exposures could be allocate to; •   A failure to recognise credit quality – the same risk weight was applied to all corporates whether they were externally rated AAA or BBB by a rating agency, such as S&P or Moody’s, despite the latter having a much higher probability of default; •   Bank exposures were risk weighted better than corporates – any exposure to an Organisation for Economic Development (OECD) bank, primarily those operating in the more developed economies, attracted less regulatory capital than any corporate exposure even if the corporate had a much better external rating; •   Tenor was not taken into account – the same risk weights applied to short-term exposures, those with one year or less to run, and long-term ones; •   Portfolio diversification effects were not recognised – simply summing risk exposures did not take into account diversification benefits, the potential offsetting effects of holding a range of different assets with varying potential loss levels. To address these issues, a more comprehensive framework, entitled “International Convergence of Capital Measurement and Capital Standards”, also known as Basel II, was published in June 2004. — location: [1007](kindle://book?action=open&asin=B0B5M2RZ1B&location=1007) ^ref-15538 A few problems with Basel I prompted Basel 2. ---