5.4 Basel Capital Requirements

205. European prudential supervision for banks and investment firms is based on the risk based approach as set forth in the Basel Capital Accord for setting the required levels of capital. The major risk concepts applied in the Basel Capital Accord are credit, market and operational risk. Although these three risk types are not all-encompassing (there are other types of risks which can have significant impact on the risk based capital requirements of certain institutions), they cover the majority of risks taken by banks. The Basel Committee has set global standards,1 which in the European Union have been implemented in the CRD 2013 and the CRR, and which are also applicable to investment firms. The Basel standards have, however, been aimed at internationally active banks2 and not at investment firms. The next sections will explore the Basel concepts of credit, market and operational risk.