The Basel Committee on Banking Supervision (BCBS) released the revised capital accord, also called, Basel II, on June 26, 2004. It is an extension of the regulations for minimum capital requirements as defined under Basel I.
The Basel II framework operates under three pillars.
The Basel II framework operates under three pillars: Capital Adequacy Requirements, Supervisory Review and Market Discipline
The regulatory bank capital comprised of three levels (or ‘tiers’) of capital.
The Basel-II accord recognizes three big risk buckets: credit risk, market risk, and operational risk
Basel II provides guidelines for calculation of minimum regulatory capital ratios and confirms the definition of regulatory capital and an 8% minimum coefficient for regulatory capital over risk-weighted assets.
Basel II also provides banks with more informed approaches to calculate capital requirements based on credit risk, while taking into account each type of asset’s risk profile and specific characteristics. The two main approaches include the: Standardized approach, Internal ratings-based approach (Foundation Internal Ratings-based approach and Advanced Internal Ratings-based approach)
The Basel framework provides three approaches for the measurement of the capital charge for operational risk. These are Basic Indicator Approach (BIA), Standardized Approach and Advanced Measurement Approach
For market risk the preferred approach is VaR (value at risk)
Basel II introduced a new 150% weighting for borrowers with lower credit ratings
It comprises of common shareholder equity, Disclosed Reserves and non-cumulative perpetual preferred stock
Tier 1 capital deemed to have highest capacity to absorbing losses in order to allow banks continue to operate on ongoing basis.
Tier 2 capital cannot be more than 100% of Tier 1 capital and within Tier 2 capital, subordinated debt is limited to a maximum of 50% of Tier 1 capital. losses without triggering bankruptcy of the bank.
There are four principles that governs the Supervisory Process Review.
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