Banks operate across borders, but regulation is national. That mismatch created problems. In the 1970s, bank failures in one country threatened the stability of others. In response, central bank governors from ten countries formed the Basel Committee on Banking Supervision in 1974. The committee meets in Basel, Switzerland, and issues standards that countries adopt voluntarily.

The first Basel Accord, in 1988, set minimum capital requirements. Banks had to hold capital equal to at least 8 percent of their risk-weighted assets. That meant a bank with $100 million in loans had to hold $8 million in capital. The idea was to ensure banks could absorb losses without failing. Basel II, in 2004, refined the rules, allowing banks to use internal models to assess risk. That approach backfired in 2008, when those models underestimated the risks of mortgage-backed securities.

Basel III, agreed in 2010 and phased in over the following decade, tightened capital requirements, added a leverage ratio, and introduced liquidity rules. Banks must hold enough high-quality liquid assets to survive a 30-day stress scenario. They must also maintain a countercyclical buffer that builds up in good times and can be released in bad times.

The Basel Accords are not law. They are standards. Each country implements them through its own regulations. The United States, the European Union, and other jurisdictions have adopted versions of Basel III, though not identically. The differences matter for international banks.