BASEL I

Towards the end of the '80s the large industrialized countries asked the Bank for International Settlements (BIS) to formulate a set of prudential regulations with the aim of guaranteeing the strength and stability of the banking sector. The outcome of that formulation by BIS was an accord in 1988 generally referred as BASEL I.

This BASEL I recommended to banks to set aside 8% of the capital spend for loans using a simple matrix, which distinguished between creditors (sovereigns, banks and companies) and their geographical location. By using this approach, government risks in the Organization of Economic Co-operation & Development (OECD) area were not weighted whereas, at the other extreme, all corporates were weighted at 100%. Depending on their geographical location banks got a fairly good deal. In real term this mean that if a bank sanctions a loan of hundred million to an entity then it must set aside it's own funds of eight million.