Basel Ii overview - What is leading to Know About the Basel Ii Framework

The Seven Spiritual Laws Of Success Summary - Basel Ii overview - What is leading to Know About the Basel Ii Framework

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What is Basel Ii? Who is behind it? Who has advanced it? Is it an international law? Do we have to comply? Who has to comply? May I have a Basel Ii Summary? These are very leading questions, and it is good to start from their answers.

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The Seven Spiritual Laws Of Success Summary

The Basel Ii Framework (the lawful name is "International Convergence of Capital estimation and Capital Standards: a Revised Framework") is a new set of international standards and best practices that define the minimum capital requirements for internationally active banks. Banks have to mouth a minimum level of capital, to ensure that they can meet their obligations, they can cover unexpected losses, and can promote social reliance (which is of sublime importance for the international banking system).

Banks like to spend their money, not keep them for time to come risks. Regulatory capital (the minimum capital required) is an obligation. A low level of capital is a threat for the banking system itself: Banks may fail, depositors may lose their money, or they may not trust banks any more. This framework establishes an international minimum standard.

Basel Ii will be applied on a consolidated basis (combining the bank's activities in the home country and in the host countries).

The framework has been advanced by the Basel Committee on Banking supervision (Bcbs), which is a committee in the Bank for International Settlements (Bis), the world's oldest international financial organization (established on 17 May 1930).

The Basel Committee on Banking supervision was established by the G10 (Group of Ten countries) in 1974. These 10 countries (have become 11) are the rich and advanced countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States.

The G10 were behind the improvement of the previous (Basel i) framework, and now they have endorsed the new Basel Ii set of papers (the main paper and the many explanatory papers). Only banks in the G10 countries have to implement the framework, but more than 100 countries have volunteered to adopt these principles, or to take these system into account, and use them as the basis for their national rulemaking process.

Basel i was not risk sensitive. All loans given to corporate borrowers were branch to the same capital requirement, without taking into catalogue the capability of the counterparties to repay. We ignored the reputation rating, the reputation history, the risk supervision and the corporate governance structure of all corporate borrowers. They were all the same: hidden corporations.

Basel Ii is much more risk sensitive, as it is aligning capital requirements to the risks of loss. Better risk supervision in a bank means that the bank may be able to allocate less regulatory capital.

In Basel Ii we have three Pillars:

Pillar 1 has to do with the calculation of the minimum capital requirements. There are dissimilar approaches:

The standardized advent to reputation risk: Banks rely on external measures of reputation risk (like the reputation rating agencies) to collate the reputation capability of their borrowers.

The Internal Ratings-Based (Irb) approaches too reputation risk: Banks rely partly or fully on their own measures of a counterparty's reputation risk, and settle their capital requirements using internal models.

Banks have to allocate capital to cover the Operational Risk (risk of loss because of errors, fraud, disruption of It systems, external events, litigation etc.). This can be a difficult exercise.

The Basic Indicator advent links the capital charge to the gross income of the bank. In the Standardized Approach, we split the bank into 7 company lines, and we have 7 dissimilar capital allocations, one per company line. The advanced estimation Approaches are based on internal models and years of loss experience.

Pillar 2 covers the Supervisory characterize Process. It describes the system for effective supervision.

Supervisors have the compulsion to evaluate the activities, corporate governance, risk supervision and risk profiles of banks to settle whether they have to change or to allocate more capital for their risks (called Pillar 2 capital).

Pillar 3 covers transparency and the compulsion of banks to disclose meaningful information to all stakeholders. Clients and shareholders should have a adequate comprehension of the activities of banks, and the way they administrate their risks.

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