Final answer:
Basel I, established in 1988, focused on improving the stability of the global banking system by setting minimum capital requirements and addressing credit risk, which indirectly mitigated risks related to trade imbalances and financial capital flows.
Step-by-step explanation:
Risks Addressed by Basel I
The primary risks addressed by the 1988 Basel I Accord relate to bank capital adequacy and credit risk. The international agreement, developed by the Basel Committee on Banking Supervision (BCBS), aimed to strengthen the stability of the international banking system. It did so by setting minimum capital requirements for banks to ensure they could absorb a reasonable level of loss before becoming insolvent. Basel I focused on credit risk by requiring banks to maintain capital equal to at least 8% of their risk-weighted assets. This meant that for every $$100 of loans extended, banks needed to have $$8 of capital. The objective was to minimize the risk of bank failures and maintain systemic stability in the financial system.
One of the risks Basel I attempted to mitigate is the risk of an unstable banking sector caused by inadequate capital levels, which could lead to a large trade imbalance and significant inflows or outflows of financial capital. By implementing minimum capital requirements, banks were better equipped to handle losses without destabilizing the economy. However, Basel I did not directly address the risk of exchange rate fluctuations leading to trade imbalances.