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Basel II
From Wikipedia, the free encyclopedia
Basel II is the second of the Basel Accords, (now extended and effectively superseded by Basel III),
which are recommendations on banking laws and regulations issued by the Basel Committee on
Banking Supervision.
Basel II, initially published in June 2004, was intended to create an international standard for
banking regulators to control how much capital banks need to put aside to guard against the types of
financial and operational risks banks (and the whole economy) face. One focus was to maintain
sufficient consistency of regulations so that this does not become a source of competitive inequality
amongst internationally active banks. Advocates of Basel II believed that such an international
standard could help protect the international financial system from the types of problems 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 management requirements designed to ensure that a bank has
adequate capital for the risk the bank exposes itself to through its lending and investment practices.
Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater
the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.
Politically, it was difficult to implement Basel II in the regulatory environment prior to 2008, and
progress was generally slow until that year's major banking crisis caused mostly by credit default
swaps, mortgage-backed security markets and similar derivatives. As Basel III was negotiated, this
was top of mind, and accordingly much more stringent standards were contemplated, and quickly
adopted in some key countries including the USA.
Contents
1 Objective
2 The accord in operation
2.1 The first pillar
2.2 The second pillar-Supervisory Review
2.3 The third pillar-Disclosures
3 Recent chronological updates
3.1 September 2005 update
3.2 November 2005 update
3.3 July 2006 update
3.4 November 2007 update
3.5 July 16, 2008 update
3.6 January 16, 2009 update
3.7 July 89, 2009 update
4 Basel II and the regulators
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Objective
The final version aims at:
1. Ensuring that capital allocation is more risk sensitive;
2. Enhance disclosure requirements which would allow market participants to assess the capital
adequacy of an institution;
3. Ensuring that credit risk, operational risk and market risk are quantified based on data and
formal techniques;
4. Attempting to align economic and regulatory capital more closely to reduce the scope for
regulatory arbitrage.
While the final accord has at large addressed the regulatory arbitrage issue, there are still areas where
regulatory capital requirements will diverge from the economic capital.
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Corporation, and the Office of Thrift Supervision) announced their revised plans for the U.S.
implementation of the Basel II accord. This delays implementation of the accord for US banks by 12
months.[1]
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the 1996 rules governing trading book capital was issued by the newly expanded Basel Committee.
These measures include the enhancements to the Basel II framework, the revisions to the Basel II
market-risk framework and the guidelines for computing capital for incremental risk in the trading
book.[7]
Implementation progress
Regulators in most jurisdictions around the world plan to implement the new accord, but with widely
varying timelines and use of the varying methodologies being restricted. The United States' various
regulators have agreed on a final approach.[9] They have required the Internal Ratings-Based
approach for the largest banks, and the standardized approach will be available for smaller banks.[10]
In India, Reserve Bank of India has implemented the Basel II standardized norms on 31 March 2009
and is moving to internal ratings in credit and AMA(Advanced Measurement Approach) norms for
operational risks in banks.
Existing RBI norms for banks in India (as of September 2010): Common equity (incl of buffer):
3.6%(Buffer Basel 2 requirement requirements are zero.); Tier 1 requirement: 6%. Total Capital : 9%
of risk weighted assets.
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According to the draft guidelines published by RBI the capital ratios are set to become: Common
Equity as 5% + 2.5% (Capital Conservation Buffer) + 02.5% (Counter Cyclical Buffer), 7% of Tier
1 capital and minimum capital adequacy ratio (excluding Capital Conservation Buffer) of 9% of Risk
Weighted Assets. Thus the actual capital requirement is between 11 and 13.5% (including Capital
Conservation Buffer and Counter Cyclical Buffer).[11]
In response to a questionnaire released by the Financial Stability Institute (FSI), 95 national
regulators indicated they were to implement Basel II, in some form or another, by 2015.[12]
The European Union has already implemented the Accord via the EU Capital Requirements
Directives and many European banks already report their capital adequacy ratios according to the
new system. All the credit institutions adopted it by 2008-09.
Australia, through its Australian Prudential Regulation Authority, implemented the Basel II
Framework on the 1st of January 2008.[13]
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effective since 2008. In essence, they forced private banks, central banks, and bank regulators to rely
more on assessments of credit risk by private rating agencies. Thus, part of the regulatory authority
was abdicated in favor of private rating agencies.[21]
Long before the implementation of Basel II George W. Stroke and Martin H. Wiggers pointed out,
that a global financial and economic crisis will come, because of its systemic dependencies on a few
rating agencies.[22] After the breakout of the crisis Alan Greenspan agreed to this opinion in
2007.[23] At least the Financial Crisis Inquiry Report confirmed this point of view in 2011.[24][25]
See also
Basel Accords
Basel III
Credit risk
Operational risk
Market risk
Capital adequacy
Solvency II
No Solutions Basel
References
1. ^ FRB Press Release:Banking Agencies Announce Revised Plan for Implementation of Basel II
Framework (http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050930/default.htm)
2. ^ International Convergence of Capital Measurement and Capital Standards:A Revised Framework
(http://www.bis.org/publ/bcbs118.pdf)
3. ^ International Convergence of Capital Measurement and Capital Standards:A Revised
Framework:Comprehensive Version (http://www.bis.org/publ/bcbs128.pdf)
4. ^ OCC Approves Basel II Capital Rule (http://www.occ.gov/news-issuances/news-releases/2007/nrocc-2007-123.html)
5. ^ Agencies Issue Final Guidance on Supervisory Review Process (Pillar 2) Related to Implementation of
Basel II Advanced Approaches (http://www.occ.gov/news-issuances/news-releases/2008/nria-2008-81.html)
6. ^ Revisions to the Basel II market risk framework (http://www.bis.org/publ/bcbs148.pdf?noframes=1)
7. ^ Basel II:Revised international capital framework (http://www.bis.org/publ/bcbsca.htm)
8. ^ Sheila Bair Speech (http://www.fdic.gov/news/news/speeches/archives/2007/chairman/spjun2507.html)
9. ^ OCC Notice of Proposed Rulemaking (http://www.occ.treas.gov/fr/fedregister/71fr55830.pdf)
10. ^ FRB:Press Release, June 26, 2008 (http://www.federalreserve.gov/newsevents/press/bcreg
/20080626b.htm)
11. ^ [1] (http://rbidocs.rbi.org.in/rdocs/content/pdfs/DRA301211.pdf)
12. ^ Implementation of the new capital adequacy framework in non-Basel Committee member countries:
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External links
Bank for International Settlements (BIS)
Basel II: Revised international capital framework (http://www.bis.org/publ/bcbsca.htm)
Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised
Framework (BCBS) (http://www.bis.org/publ/bcbs107.htm)
Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised
Framework (BCBS) (November 2005 Revision) (http://www.bis.org/publ/bcbs118.htm)
Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised
Framework, Comprehensive Version (BCBS) (June 2006 Revision) (http://www.bis.org
/publ/bcbs128.htm)
Office of the Comptroller of the Currency (United States)
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Categories: Basel II
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