Final answer:
The primary difference between Basel I and Basel III is the way in which risk is measured and accounted for. Basel I used a simple standardized approach, while Basel III introduced a more risk-sensitive approach known as the Internal Ratings-Based approach.
Step-by-step explanation:
The primary difference between Basel I and the proposed Basel III in calculating risk-adjusted assets is the way in which risk is measured and accounted for.
In Basel I, a simple standardized approach was used, where all assets were assigned fixed risk weights based on broad categories. This approach did not take into account the individual risk profiles of assets or the specific risk management practices of banks.
On the other hand, Basel III introduced a more risk-sensitive approach known as the Internal Ratings-Based (IRB) approach. This approach allows banks to use their own internal models to estimate the credit risk associated with their assets, taking into consideration factors such as the creditworthiness of borrowers, collateral, and other risk mitigants. This results in a more accurate assessment of risk-adjusted assets and a better reflection of a bank's actual risk exposure.