The Three Pillars of the Basel II Accord

1. The three pillars of the Basel II accord Presented by- Nahid Anjum

2. Agenda Basel Accords Base II Accord The three pillars The first pillar The second pillar The third pillar

3. Basel Accords recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision (BCBS) BCBS maintains its secretariat  at the  Bank for International Settlements  in  Basel, Switzerland the committee normally meets there

4. Base II Accord second of the  Basel Accords initially published in June 2004 p urpose is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face while maintaining sufficient consistency so that this does not become a source of competitive inequality amongst internationally active banks

5. Base II Accord Advocates of Basel II believe that such an international standard can 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 holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices

6. Base II Accord Its aims are- Ensuring that  capital allocation  is more risk sensitive Enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution Ensuring that credit risk,   operational risk and market risk  are quantified based on data and formal techniques Attempting to align economic and regulatory capital more closely to reduce the scope for  regulatory arbitrage

7. The three pillars 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 The  credit risk component can be calculated in three different ways of varying degree of sophistication, namely  standardized approach, foundation IRB and advanced IRB For  operational risk, there are three different approaches -  basic indicator approach or BIA, standardized approach or TSA, and the internal measurement approach For  market risk the preferred approach is VaR i.e. value at risk

8. The three pillars The second pillar deals with the regulatory response to the first pillar provides a framework for dealing with all the other risks a bank may face, such as  systemic risk, pension risk, concentrated risk, strategic risk, reputational risk, liquidity risk and legal risk 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

9. The three pillars The third pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution 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  It must be consistent with how the senior management including the board assess and manage the risks of the institution

10. Thank You