Banking Supervision: From Basel I to III

René Doff

This chapter will discuss banking supervision, as well as evaluating the differences and similarities between banking and insurance supervision. Banks and insurance firms jointly comprise the financial industry. Banking regulation is relevant background for the Solvency II debate, because much of the Solvency II framework is built upon experiences in the banking industry. After describing the historic origins of Basel II, this chapter will elaborate further upon its technical specifications, before examining the impact of Basel II on the banking industry and the economic system. The financial crisis (as described in Chapter 7) led to revisions of the banking supervisory framework that was amended by Basel III. Finally, the chapter will compare the banking and insurance supervision frameworks.

BACKGROUND OF BANKING RISKS

First, let us look at the characteristics of a typical bank in order to better understand the historical background of banking. Banks typically issue long-term assets, such as mortgages and corporate loans. Their liabilities are short term, such as retail savings (the client can call these savings on demand) and six-months commercial paper obtained from the