Basic Understanding Of Basel II

Basel II is a revised version of the 1988 Capital Accord,written by the Basel Committee on Banking Supervision(BCBS). Its formal title is the International Convergence of Capital Measurement and Capital Standards:A Revised Framework.

Basel II aims to produce greater consistency in the way banks and their regulars approach cross-border risk management. One of its main goals is to align regulatory capital with risk management,which was deemed one of the failings of the original Accord.

Basel II is based upon three “pillars”

• Pillar I:Minimum Capital Requirements. Improvement and standardization of the calculation of three major risks which banks face:credit risk,operational risk and market risk
• Pillar II:Supervisiory Review Process. Provision of a framework for regulators when dealing with all other forms of risk,which the Accord refers to as “residual risk”
• Pillar III:Market Discipline. Increase in disclosure requirements for banks to allow better market visibility and more informed pricing from counterparties.

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