basel 2 accord

7/27/2019 Basel 2 Accord

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The three pillars of the Basel IIaccord



Agenda

• Basel Accords

• Base II Accord

•

The three pillars – The first pillar

– The second pillar

– The third pillar



Basel Accords

• recommendations on banking laws and

regulations

• issued by the Basel Committee on Banking

Supervision (BCBS)

• BCBS maintains its secretariat at the Bank for

International Settlements in Basel, Switzerland

• the committee normally meets there



Base II Accord

• second of the Basel Accords

• initially published in June 2004

• purpose is to create an international standard

that banking regulators can use when creatingregulations about how much capital banks needto put aside to guard against the types offinancial and operational risks banks face while

maintaining sufficient consistency so that thisdoes not become a source of competitiveinequality amongst internationally active banks



Base II Accord

• Advocates of Basel II believe that such aninternational standard can help protect theinternational financial system from the types ofproblems that might arise should a major bank or

a series of banks collapse• In theory, Basel II attempted to accomplish this by

setting up risk and capital managementrequirements designed to ensure that a bank

holds capital reserves appropriate to the risk thebank exposes itself to through its lending andinvestment practices



Base II Accord

• Its aims are-

– Ensuring that capital allocation is more risk sensitive

– Enhance disclosure requirements which will allow

market participants to assess the capital adequacy ofan institution

– Ensuring that credit risk, operational risk and marketrisk are quantified based on data and formaltechniques

– Attempting to align economic and regulatory capitalmore closely to reduce the scope for regulatoryarbitrage



The three pillars

• The first pillar – deals with maintenance of regulatory capital

calculated for three major components of risk that abank faces- credit risk, operational risk, and market

risk – The credit risk component can be calculated in three

different ways of varying degree of sophistication,namely standardized approach, foundation IRB andadvanced IRB

– For operational risk, there are three differentapproaches - basic indicator approach or BIA,standardized approach or TSA, and the internalmeasurement approach

– For market risk the preferred approach is VaR i.e.value at risk



The three pillars

• The second pillar

– deals with the regulatory response to the first

pillar

– provides a framework for dealing with all the

other risks a bank may face, such as systemic risk,

pension risk, concentrated risk, strategic risk,

reputational risk, liquidity risk and legal risk – gives banks a power to review their risk

management system

– Internal Capital Adequacy Assessment Process

(ICAAP) is the result of Pillar II of Basel II accords



The three pillars

• The third pillar

– aims to complement the minimum capitalrequirements and supervisory review process bydeveloping a set of disclosure requirements which willallow the market participants to gauge the capitaladequacy of an institution

– allow market discipline to operate by requiringinstitutions to disclose details on the scope of

application, capital, risk exposures, risk assessmentprocesses and the capital adequacy of the institution

– It must be consistent with how the seniormanagement including the board assess and manage

the risks of the institution

basel 2 accord

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