Basel Accord II

Assist. Prof. Dr. Mehmed Gani Student: Adnan Hadziibrahimovic Date: 17.05.2012

What is the Basel Accord II

Basel

II settles regulations concerning banking The document includes methods of measuring risk and calculating capital requirements. The Basel Committee does not force banks to use exactly these methods

Difference between Basel Accord I & II

New Accord gives banks freedom of choice Banks can adapt analytical methods of computing the amount of required capital and the advancement level of it to their own needs Banks have an opportunity to reduce their economic capital and regulatory capital through efficient data management and reporting. Banks can apply two approaches: to calculate credit risk: the standardized approach and the Internal Rating Based

Difference between Basel Accord I & II

The Standardized Approach Capital requirements are equal 8% of the outstanding amount of money The Internal Rating Based approach: Banks are ought to calculate borrowers probability of default using internal measures. Banks can also estimate the loss given default and the exposure at default using theirs own methods

The Pillars of Basel Accord II

capital requirements introduces methods and rules of computing required capital, supervisory review determines rights and duties of banking supervisors, market discipline sets the rules of reporting the information concerning risk taken by the bank.
minimum

The Pillars of Basel Accord II

The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk, Other risks are not considered fully quantifiable at this stage. Credit Risk can be calculated by using one of three approaches: 1. Standardised Approach 2. Foundation IRB 3. Advanced IRB Approach

The Pillars of Basel Accord II

Standardised Approach: The standardized approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories used under Basel 1 were: 0% for government bonds, 20% for exposures to OECD Banks, 50% for first line residential mortgages and 100% weighting on consumer loans and unsecured commercial loans

The Pillars of Basel Accord II

The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. Banking Risks: systemic risk pension risk concentration risk strategic risk reputational risk, liquidity risk

The Pillars of Basel Accord II

The third pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements: Market discipline supplements regulation as sharing of information facilitates assessment of the bank by others including: Investors Analysts Customers Other banks and rating agencies which leads to good corporate governance

The Pillars of Basel Accord II

Goal of Third Pillar: Is to allow market discipline to operate by requiring institutions to disclose details on the scope of Application Capital Risk exposures Risk assessment processes The capital adequacy of the institution It must be consistent with how the senior management including the board assess and manage the risks of the institution.

Asymptotic Risk Factor Model

The Asymptotic Risk Factor Model gives the opportunity to calculate economic, capital requirements using risk weight formulas The idea behind the ASRFM is that the market risk is completely diversified and the portfolio becomes more fine-grained means that large individual exposures have smaller shares in the exposure of the whole portfolio.

Conclusion
The aim of Basel II is to better align the minimum capital required by regulators (so-called regulatory capital) with risk. The first Basel Accord stemmed from its simplicity for example all unsecured corporate exposures were weighted 100% whether the company was a highly profitable global giant or a struggling small business. The result is Basel II is far more complex than Basel I and goes far beyond Basel I is

Conclusion

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