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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Basel II is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.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 2.3 The third pillar 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 4.1 Implementation progress 5 Basel II and the global financial crisis 6 See also 7 References 8 External links
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Objective
The final version aims at: 1. Ensuring that capital allocation is more risk sensitive; 2. Enhance disclosure requirements which will 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 largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic capital.
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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. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. Internal Capital Adequacy Assessment Process (ICAAP) is the result of Pillar II of Basel II accords
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On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. No new elements have been introduced in this compilation. This version is now the current version.[3]
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automated reporting solutions which include the reports required under COREP/FINREP. For example, U.S. Federal Deposit Insurance Corporation Chair Sheila Bair explained in June 2007 the purpose of capital adequacy requirements for banks, such as the accord: There are strong reasons for believing that banks left to their own devices would maintain less capitalnot morethan would be prudent. The fact is, banks do benefit from implicit and explicit government safety nets. Investing in a bank is perceived as a safe bet. Without proper capital regulation, banks can operate in the marketplace with little or no capital. And governments and deposit insurers end up holding the bag, bearing much of the risk and cost of failure. History shows this problem is very real as we saw with the U.S. banking and S & L crisis in the late 1980s and 1990s. The final bill for inadequate capital regulation can be very heavy. In short, regulators can't leave capital decisions totally to the banks. We wouldn't be doing our jobs or serving the public interest if we did.[8]
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. According to the draft guidelines published by RBI the capital ratios are set to become: Common Equity as 5% + 2.5% (Capital Conservation Buffer) + 0-2.5% (Counter Cyclical Buffer), 7% of tier I capital and minimum capital adequacy ratio (excluding Capital Conservation Buffer) 9% of Risk Weighted Assets.Thus the actual capital requirement is between 11-13.5% (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. Australia, through its Australian Prudential Regulation Authority, implemented the Basel II Framework on 1 January 2008.[13]
revised global standards, popularly known as Basel III.[16] The Committee claimed that the new standards would
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revised global standards, popularly known as Basel III.[16] The Committee claimed that the new standards would lead to a better quality of capital, increased coverage of risk for capital market activities and better liquidity standards among other benefits. Nout Wellink, former Chairman of the BCBS, wrote an article in September 2009 outlining some of the strategic responses which the Committee should take as response to the crisis.[17] He proposed a stronger regulatory framework which comprises five key components: (a) better quality of regulatory capital, (b) better liquidity management and supervision, (c) better risk management and supervision including enhanced Pillar 2 guidelines, (d) enhanced Pillar 3 disclosures related to securitization, off-balance sheet exposures and trading activities which would promote transparency, and (e) cross-border supervisory cooperation. Given one of the major factors which drove the crisis was the evaporation of liquidity in the financial markets,[18] the BCBS also published principles for better liquidity management and supervision in September 2008.[19] A recent OECD study [20] suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced adverse systemic shocks that materialised during the financial crisis. 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. Tighter capital requirements based on risk-weighted assets, introduced in the Basel III, may further contribute to these skewed incentives. New liquidity regulation, notwithstanding its good intentions, is another likely candidate to increase bank incentives to exploit regulation. Think-tanks such as the World Pensions Council (WPC) have also argued that European legislators have pushed dogmatically and naively for the adoption of the Basel II recommendations, adopted in 2005, transposed in European Union law through the Capital Requirements Directive (CRD), 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]
See also
Basel Accords Basel III Credit risk Operational risk Market risk Capital adequacy Solvency II
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/nr-occ-2007123.html)
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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/nr-ia-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. ^ Shelia 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: Summary of responses to the 2006 follow-up Questionnaire on Basel II implementation (http://www.bis.org/fsi/fsipapers06.htm) 13. ^ Information Paper: Implementation of the Basel II Capital Framework (http://www.apra.gov.au/adi/Documents/APRA_IP_PillarII_122007_v3.pdf) 14. ^ Question 22:What impact has the financial crisis had on Basel II? (http://www.cml.org.uk/cml/policy/issues/721) 15. ^ Businessweek:How New Banking Rules Could Deepen the U.S Crisis (http://www.businessweek.com/magazine/content/08_17/b4081083014665.htm) 16. ^ The Basel Committee's response to the financial crisis: report to the G20 (http://www.bis.org/publ/bcbs179.htm) 17. ^ Beyond the Crisis:the Basel Committee's strategic response (http://www.banquefrance.fr/fileadmin/user_upload/banque_de_france/publications/Revue_de_la_stabilite_financiere/etude13_rsf_0909. pdf) 18. ^ Global Financial Crisis - What caused it and how the world responded (http://www.canstar.com.au/globalfinancial-crisis/) 19. ^ Principles for Sound Liquidity Management and Supervision (http://www.bis.org/publ/bcbs144.htm) 20. ^ "Systemically Important Banks and Capital Regulation Challenges" (http://dx.doi.org/10.1787/5kg0ps8cq8q6-en) . OECD Publishing. December 2011. http://dx.doi.org/10.1787/5kg0ps8cq8q6-en . 21. ^ M. Nicolas J. Firzli, "A Critique of the Basel Committee on Banking Supervision" Revue Analyse Financire, Nov. 10 2011 & Q2 2012
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) 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/nr-ia-2008-81.html) OCC Approves Basel II Capital Rule (http://www.occ.gov/ftp/release/2007-123.htm) UK government
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Capital Requirements Directive/Basel 2 (http://www.fsa.gov.uk/Pages/About/What/International/basel/index.shtml) (FSA) EU Directive implementing the new Basel 2 Accord (http://www.hm-treasury.gov.uk/fin_eufs_cad3.htm) Hong Kong Monetary Authority (HKMA) Validating Risk Rating Systems under the IRB Approaches, HKMA (http://www.info.gov.hk/hkma/eng/bank/spma/attach/CA-G-4.pdf) Return of capital adequacy ratio (final version) - Completion instructions, HKMA (http://www.info.gov.hk/hkma/eng/basel2/index.htm) Return Templates of capital Adequacy Ratio, HKMA (http://www.info.gov.hk/hkma/eng/bank/retform/pdf/MA(BS)3.pdf) Others An academic response to Basel II (http://www.math.ethz.ch/~baltes/ftp/Responsev3.pdf) Coherent measures of risk (a widely quoted paper) (http://www.math.ethz.ch/~delbaen/ftp/preprints/CoherentMF.pdf) FRB Boston paper on measurement of operational risk (http://www.bos.frb.org/economic/wp/wp2006/wp0613.htm) Danelsson, Jn. "The Emperor Has No Clothes: Limits to Risk Modelling." Journal of Banking and Finance, 2002, 26, pp. 127396. (http://qed.econ.queensu.ca/pub/faculty/milne/872/Danielsson%202002.pdf) Canada Capital Adequacy Requirements (http://www.osfibsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/guidelines/car_a1_e.pdf) OSFI A Nontechnical Analysis of Basel I and II (https://jscholarship.library.jhu.edu/bitstream/handle/1774.2/32826/Basel%20I%2c%20Basel%20II%2c%2 0and%20Emerging%20Markets%20a%20Nontechnical%20Analysis052008.pdf?sequence=1) Retrieved from "http://en.wikipedia.org/w/index.php?title=Basel_II&oldid=520957229" Categories: Basel II This page was last modified on 1 November 2012 at 21:23. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. See Terms of Use for details. Wikipedia is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization.
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