The aim of Pillar 3 is to allow market discipline to operate by requiring institutions to disclose details on the scope of application, capital, risk exposures, risk assessment processes, and the capital adequacy of the institution. Pillar 1 establishes rules for the calculation of minimum capital for credit, market, operational risk and leverage (capital adequacy requirements). Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Australian Prudential Regulation Authority, FRB Press Release: Banking Agencies Announce Revised Plan for Implementation of Basel II Framework, International Convergence of Capital Measurement and Capital Standards: A Revised Framework, International Convergence of Capital Measurement and Capital Standards: A Revised Framework: Comprehensive Version, "OCC: Agencies Issue Final Guidance on Supervisory Review Process (Pillar 2) Related to Implementation of Basel II Advanced Approaches", Revisions to the Basel II market risk framework, "Basel II: Revised international capital framework", "Implementation of the new capital adequacy framework in non-Basel Committee member countries: Summary of responses to the 2006 follow-up Questionnaire on Basel II implementation", "Information Paper: Implementation of the Basel II Capital Framework", "How New Banking Rules Could Deepen the U.S Crisis", "The Basel Committee's response to the financial crisis: report to the G20", Beyond the Crisis: the Basel Committee's strategic response, "Global Financial Crisis - What caused it and how the world responded - Canstar", "Principles for Sound Liquidity Risk Management and Supervision – final document", "Systemically Important Banks and Capital Regulation Challenges", "Alan Greenspan: "Die Ratingagenturen Wissen nicht was sie tun, Basel II: Revised international capital framework, Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS), Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision), Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision), Agencies Issue Final Guidance on Supervisory Review Process (Pillar 2) Related to Implementation of Basel II Advanced Approaches, EU Directive implementing the new Basel 2 Accord, Validating Risk Rating Systems under the IRB Approaches, HKMA, Return of capital adequacy ratio (final version) – Completion instructions, HKMA, Return Templates of capital Adequacy Ratio, HKMA, Coherent measures of risk (a widely quoted paper), FRB Boston paper on measurement of operational risk. The preferred approach for market risk is VaR, discussed earlier. The Basel II framework is comprised of three complementary pillars: Pillar 1 establishes rules for the calculation of minimum capital for Credit, Market and Operational Risk (capital adequacy requirements). Enhancing disclosure requirements which would allow market participants to assess the capital adequacy of an institution; Attempting to align economic and regulatory capital more closely to reduce the scope for, This page was last edited on 22 June 2020, at 11:56. [25][26], The first pillar: Minimum capital requirements, M. Nicolas J. Firzli, "A Critique of the Basel Committee on Banking Supervision". ]�J&���_()�0K�dKe���/�)v��eR@����b�x/O��>������L�t��,3nǥ[N��>��ӧr�S6��p(�s���?��ަH}��Ey�J�&��7���ߒZE*�1ɟ��� ߋrUL�BȾ� L��==؊ %H-����~��r�ia-�1l����sTV�(΍����ٿB��mHG���6[������Py� "�D��C���Dz�J���P}�f?��Z��e���e����+��W���j+��� z��U���}!͇6��c��?N�y;�wSsqRś}۴sl�zqd����B \�=.py���n��8l���^���WDZ� ��k��!�;a�������z^I��������1D�q��r����|]��D!�$QtW��:���`�X�Q��Q�� ��F������4<6 )�'b†�%M�d& 2. Table 1: Summary of Basel III requirements Source: BIS. It is intended to strengthen the measurement and monitoring of financial institutions' capital by adopting a more risk sensitive approach to capital management. Herring Director of the Lauder Institute Co-Director, The Wharton Financial Institutions Center herring @wharton.upenn.edu Financial Stability and Implications of Basel II Central Bank of the Republic of Turkey 17 May 2005. Those measures should help the global industry progress in its general understanding of credit risk management issues. As the Basel II recommendations are phased in by the banking industry it will move from standardised requirements to more refined and specific requirements that have been developed for each risk category by each bank.

This means the greater the risk the more capital is required to ensure its solvency; if this approach is adopted widely it contributes to financial stability, locally and internationally. 319 0 obj <>/Filter/FlateDecode/ID[<454806D8578D024B9146ADFDF7D9DB62>]/Index[308 85]/Info 307 0 R/Length 81/Prev 546784/Root 309 0 R/Size 393/Type/XRef/W[1 3 1]>>stream 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. {�f�Vi�n�M9�D�#�x��Φ�v�p/nAU��2e`�%�����$+ߡc�'#~�����k5����z\&��E���=3�OF��c�V|����9xf�6�JO7. In essence, they forced private banks, central banks, and bank regulators to rely more on assessments of credit risk by private rating agencies. Basel II attempted to accomplish this by establishing risk and capital management requirements to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending, investment and trading activities.
In general, the disclosures under Pillar 3 apply to the top consolidated level of the banking group to which the Basel II framework applies. Pillar 2 is an internal discipline to evaluate the adequacy of the regulatory capital requirement under Pillar 1 and other non Pillar 1 risks. This pillar requires the PRA to undertake a supervisory review to assess the robustness of the regulated entity's internal assessment (risk management and supervision). • bank-level, or micro prudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress. ���u�v��mc��z�9ECwR��cPmƦ����(+�Y���! Basel - II - Market Discipline (Third Pillar) - Free download as Powerpoint Presentation (.ppt), PDF File (.pdf), Text File (.txt) or view presentation slides online. This amounts to peer review / market discipline, and it supplements regulation in that it leads to sound corporate governance. Market discipline supplements regulation as sharing of information facilitates the assessment of the bank by others, including investors, analysts, customers, other banks, and rating agencies, which leads to good corporate governance. *]|�v�����OxK i(>���/%�`�}2��H�dW�y������& � ��N�' There are three approaches to determining credit risk (IRB = internal ratings based): The standardised approach reflects the Basel I requirement, discussed earlier, but adds a new 150% rating: for borrowers with poor credit ratings. It must be consistent with how the senior management, including the board, assess and manage the risks of the institution. Journal of Banking and Finance, 2002, 26, pp. This rule establishes regulatory and supervisory expectations for credit risk, through the Internal Ratings Based Approach (IRB), and operational risk, through the Advanced Measurement Approach (AMA), and articulates enhanced standards for the supervisory review of capital adequacy and public disclosures for the largest U.S.
According to the study, capital regulation based on risk-weighted assets encourages innovation designed to circumvent regulatory requirements and shifts banks' focus away from their core economic functions. In summary, the six most noteworthy innovations that Basel II Accord brought to banking regulations were. %%EOF Expanded disclosure about capital and risk enables interested parties to better understand the risk profile of individual banks and companies and to make comparisons (market discipline). endstream endobj startxref While some argue that the crisis demonstrated weaknesses in the framework,[3] others have criticized it for actually increasing the effect of the crisis. 2817 0 obj <>stream [16] In response to the financial crisis, the Basel Committee on Banking Supervision published revised global standards, popularly known as Basel III.