Basel ii

Basel II

BASEL Accord Back ground The Basel Capital Accord was concluded by the

Basel Committee on Banking Supervision (BCBS) on July 15, 1988 in the Bank of International Settlements head office located in Basel.

The accord agrees upon a minimal capital regulation framework for internationally active commercial banks so as to reduce the risk of the international financial system.

Revised Basel II was introduced in June 2006

PILLAR 1 : MINIMUM CAPITAL REQUIREMENTS

Standardized ApproachThe standardized approach sets out specific

risk weight for certain types of credit risk.

Banks that decide to adopt the standardized ratings approach must rely on the ratings generated by external agencies.

Internal Rating based ApproachThe more advanced the approach, the higher is

the responsibility and the implementation cost for the bank.

Once a bank chooses to apply an internal-ratings-based approach for a part of its portfolio, it is expected to extend it across the whole banking group.

For exposures in non-material business units and asset classes, the implementation of the IRB approach may not be cost efficient.

PILLAR 2 : Internal & External Supervision

Following are the four key concepts of supervisory review:

Principle 1: Banks should have a process for assessing risks profile and a strategy for maintaining their capital levels.

Principle 2: Supervisors should review and evaluate banks’ internal capital assessments and strategies as well as their ability to monitor and ensure their compliance with regulatory capital ratios. Supervisors should take appropriate supervisory action if they are not satisfied with the results of this process.

Principle 3: Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum.

Principle 4: Supervisors should seek to interfere at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank.

5 Features of ICAAPBoard and senior management oversight

Sound capital assessment

Comprehensive assessment of risks

Monitoring and reporting

Internal control review

PILLAR 3 : Disclosure towards financial market

Effective disclosure is essential to ensure that market participants can better understand banks’ risk profiles and the adequacy of their capital.

It is important that disclosures are transparent and

easily comparable among financial institutions such that the market mechanisms can work efficiently.

All material information must be disclosed

Too detailed disclosure on customers, products, methodologies or systems may weaken the competitive position of some banks,

Types of disclosures

Qualitative Disclosures Qualitative disclosures providing a

summary of the general risk management objectives and policies which can be made annually

Quantitative Disclosures These disclosures are required to be

made at least twice a year.

Basic calculation of capital required