8/13/2019 Introduction Fba

1/3

I INTRODUCTION

The present moment and vision of regulating our banking system are closely related to its

unavoidable source consisting of generally accepted international standards and principles thathave been emerging and developing to its current version over the last 20 years.

After the big economic crisis in the 30ties and based on newly acquired and painfully negative

experiences, states from the capitalistic world started to implement interventional policies in the

area of bank regulation and supervision and in the area of the banking system. That policy meant

an emphasized attempt to prevent the emergence of systemic risks restricted by confining themarket operations in the area of the banking industry. The instruments used for that purpose were

the following:

- Control and intervention in the area of interest rates;- Restricting and direct supervision over a significant portion of bank operations;- Firm supervision and intervention over the capital movements in international relations; and- Restricting the scope of the activities of financial and particularly of banking institutions.That general concept of interventions was under the criticism that the excessive bank protectionfrom systemic risks was excessively suffocating their potential efficiency and that it was

excluding effects that could be achieved through their mutual competition.

With such contradictions and new global debt crisis in the second half of the 80ies of the last

century a new method for bank regulation and supervision emerged. Truly, at that time it emergedunder more complex and developed conditions. New trends became widespread driven by new

emergences in financial flows of the developed world such as:

1. Globalization and internationalization of bank operations, i.e. reduction and/or abolishing therestrictions in bank operations at the international level, and

2. Pressures for deregulation, that is, for reduction of numerous administrative restrictions forbank operations and to be replaced by stronger, more prudential (cautious, reliable, rational)

regulation and supervision.

These new trends were followed by securitization, which was increasingly evident penetrationof banks to other financial markets, precisely said, increasingly stronger acceptance of securities

as an instrument for financial operations and slight displacement of classical credit relations.Significant technological innovations have provided an additional, strong incentive for progress of

these and similar complex processes.

The process of strengthening competition has led to introducing new financial services, to

reducing their prices, to strengthening integration trends and significant changes in the structure

8/13/2019 Introduction Fba

2/3

of banks and banking industry. These trends have resulted in significant changes in the structure

of the money markets and capital markets, in profiles and characteristics of banks, in the method

of managing banks and quality of bank governance, and all that has led towards an increasing

need for highly prudential and efficient competitive bank operations. In such conditions thenecessity for developing and establishing new accounting standards was understandable without

any doubts.

It is not difficult to conclude that these trends consisted of two, seemingly opposite or

contradictory and at the first glance mutually exclusive processes: deregulation and regulation.

However, basically when they are analyzed it is clear that the first one meant opening markets andgiving a chance to competition, and the second one was a necessity for strengthening international

harmonization of elastic rules for regulation and supervision of bank operations. The second

process was aimed at achieving and maintaining the stability of international currents and a single

basis for allowed and open competition.

It is clear that weaknesses of the banking system of a country, whether it is a developing country

or already developed one, may easily threaten to the financial stability of that country, and both atthose times and particularly nowadays to very sensitive, international financial flows. The need to

regulate and strengthen individual financial systems and at the same time their mutual currents

that were generally getting more complicated started to cause a new international concern.

Globalization of banking operations during the last three decades of the last century led towards

globalization of the phenomenon of crisis and anti-crisis measures. It has been above-mentioned

that the big global debt crisis during the 80ies of the last century caused the concern and intensivecontemplation about new directions for regulation of operations of banking institutions. Another

reason for such behavior was a wish, but also a need to equalize frameworks, standards and

conditions under which banks operate on the global market.

Introduction of the International Capital Framework - Basel I

Such concern resulted in the introduction of single international standards for capitalmeasurement and capital standards of banks, proposed in December 1987 and adopted in July

1988 by the Basel Committee on Banking Supervision in its document International

Convergence of Capital Measurement and Capital Standards known as the Basel I. ThisCommittee was established in 1975 and it consisted of the representatives of the Central Banks

and Supervising Institutions of the Group of 10 G 10 (Belgium, Canada, France, Germany,

Italy, Japan, the Netherlands, Sweden, Switzerland, Great Britain, and the USA) and Luxemburg;

now it includes Spain.

This document set the single standard frameworks for bank supervision in the member states of

the Committee, with a recommendation for supervisors from other countries to accept them.

These standards ranged from definitions on bank capital to criteria for transitional period ofharmonization among bank institutions. Basically, the Document consisted of four sections: the

first section defined the capital of banks and its constituent parts; the second Section determined

the system for risk-weighing; the third section provided the frameworks of target rates ofminimum standards; and the fourth contained the transitional solutions until the deadline for

8/13/2019 Introduction Fba

3/3

implementation of the recommendations provided by this document. Briefly, it can be said that

the substance of the Basel I was to introduce a concept- category of adequate capital, that is, the

minimum rate of capital adequacy as a function of banks' assets (composed of different parts)

weighted by experienced and innate credit risk rates or generally a function of the riskmanagement system of individual banks and supervision over bank activities as a system.

The general goal of these standards was to reduce risks coming out from interrelatedness and

mutual dependence of banking institutions, differences in their market strength and problemswhich occurred due to inconsistency and incomparability of their information systems.

During the described process the participants of the Basel Committee had continuous contacts

with the authorities of the European Community in Brussels who were implementing a parallelinitiative for the development of standards for own capital (net-capital) and common solvency

rate (minimal rate of capital adequacy) and certain standards to be applied not only on banks but

also on other credit institutions in the Union. The purpose of these contacts was to insure themaximal degree of harmonization of basic elements agreed in Basel and the Union.