Final answer:
The primary difference between Basel I and Basel III in converting OBS values to on-balance-sheet credit equivalent amounts is the approach used to calculate the credit conversion factors.
Step-by-step explanation:
The primary difference between Basel I and Basel III in converting OBS (off-balance-sheet) values to on-balance-sheet credit equivalent amounts is the approach used to calculate the credit conversion factors (CCFs).
In Basel I, CCFs for off-balance-sheet items were fixed at 100% for all items, meaning that the full value of the off-balance-sheet item would be converted to an on-balance-sheet credit equivalent. On the other hand, Basel III introduced a more risk-sensitive approach where different CCFs are applied based on the type and perceived risk of the off-balance-sheet item. This means that different off-balance-sheet items can have different conversion factors.
For example, under Basel III, CCFs for certain derivative instruments may be lower than 100% if they are deemed to have lower risks associated with them. This risk-sensitive approach allows for better alignment of capital requirements with the actual risk exposure.