What is Basel II exactly?
An earlier accord, Basel I, adopted in 1988, is now widely viewed as outmoded.
The Basel II deliberations began in January 2001, driven largely by concern about the arbitrage issues that develop when regulatory capital requirements diverge from accurate economic capital calculations.
Basel II recommends "three pillars" - risk appraisal and control, supervision of the assets & monitoring of the financial market - to bring stability to the financial system.
Basel II implementation involves identifying credit risk, market risk, operational risk, etc. and then allocating adequate capital to cover potential loss. Technical terms involved are PD [probability of default], EL [expected loss], EAD [exposure at default], etc. calculation of which requires advanced data management with relevant
Originally published in 2001, a final version was issued in June 2004. Implementation of the Accord is expected by 2008.
The latest version also aims at: 1. Ensuring that capital allocation is risk sensitive. 2. Separating operational risk from credit risk, and quantifying both 3. Attempting to converge economic and regulatory capital.
Receive post updates by Email