The Basel ii Accord becomes
more important after the crisis
The Basel ii Accord (or, the International Convergence
of Capital Measurement and Capital Standards: A Revised
Framework) presents the
outcome of the Basel Committee on Banking Supervision’s
(“the Committee”) work over recent years to secure
international convergence on revisions to supervisory
regulations governing the capital adequacy of
internationally active banks.
the publication of the Committee’s first round of
proposals for revising the capital adequacy framework
in June 1999, an
extensive consultative process was set in train in all
member countries and the proposals were also circulated
to supervisory authorities worldwide.
Committee subsequently released additional proposals for
consultation in January 2001 and
April 2003 and
furthermore conducted three quantitative impact studies
related to its proposals.
As a result of these
efforts, many valuable improvements have been made to
the original proposals. The present paper is now a
statement of the Committee agreed by all its members.
It sets out the details of the agreed Framework
for measuring capital adequacy and the
minimum standard to be
achieved which the national supervisory
authorities represented on the Committee will propose
for adoption in their respective countries.
Framework and the standard it contains have been
endorsed by the Central Bank
Governors and Heads of Banking Supervision of the Group
of Ten countries.
The Committee expects
its members to move forward with the appropriate
adoption procedures in their respective countries. In a
number of instances, these procedures will include
additional impact assessments of the Committee’s
Framework as well as further opportunities for comments
by interested parties to be provided to national
The Committee intends the Framework
set out here to be available for implementation as of
However, the Committee feels that
one further year of impact studies or parallel
calculations will be needed for the most advanced
approaches, and these therefore will be available for
implementation as of year-end 2007.
document is being circulated
to supervisory authorities worldwide with a view to
encouraging them to consider adopting this revised
Framework at such time as they believe is consistent
with their broader supervisory priorities.
While the revised Framework has been designed to
provide options for banks and banking systems worldwide,
the Committee acknowledges that moving toward its
adoption in the near future may not be a first priority
for all non-G10 supervisory authorities in terms of
what is needed to strengthen
Where this is the case, each national supervisor
should consider carefully the benefits of the revised
Framework in the context of its domestic banking system
when developing a timetable and approach to
The fundamental objective of the
Committee’s work to revise
the 1988 Accord has been to develop a framework
that would further strengthen the soundness and
stability of the international banking system while
maintaining sufficient consistency that capital adequacy
regulation will not be a significant source of
competitive inequality among internationally active
The Committee believes that
the revised Framework will
promote the adoption of stronger risk management
practices by the banking industry, and views this as one
of its major benefits.
notes that, in their comments on the proposals, banks
and other interested parties have welcomed the concept
and rationale of the three pillars (minimum capital
requirements, supervisory review, and market discipline)
approach on which the revised Framework is based.
More generally, they have
expressed support for improving capital regulation to
take into account changes in banking and risk management
practices while at the same time preserving the benefits
of a framework that can be applied as uniformly as
possible at the national level.
developing the revised Framework, the Committee has
sought to arrive at significantly
more risk-sensitive capital
requirements that are conceptually sound and at
the same time pay due regard to particular features of
the present supervisory and accounting systems in
individual member countries. It believes that this
objective has been achieved.
The Committee is
also retaining key elements of the
1988 capital adequacy
framework, including the general requirement for banks
to hold total capital equivalent to at least 8% of their
risk-weighted assets; the basic structure of the 1996
Market Risk Amendment regarding the treatment of market
risk; and the definition of eligible capital.
A significant innovation of the revised Framework is
the greater use of assessments of risk provided by
banks’ internal systems as inputs to capital
In taking this step, the Committee
is also putting forward a detailed set of minimum
requirements designed to ensure the integrity of these
internal risk assessments.
It is not the
Committee’s intention to dictate the form or operational
detail of banks’ risk management policies and practices.
Each supervisor will
develop a set of review procedures for ensuring that
banks’ systems and controls are adequate to serve as
the basis for the capital calculations. Supervisors will
need to exercise sound judgements when determining a
bank’s state of readiness, particularly during the
expects national supervisors will focus on compliance
with the minimum requirements as a means of ensuring the
overall integrity of a bank’s ability to provide
prudential inputs to the capital calculations and not as
an end in itself.
The revised Framework provides
a range of options for determining the capital
requirements for credit risk and operational risk to
allow banks and supervisors to select approaches that
are most appropriate for their operations and their
financial market infrastructure.
the Framework also allows for
a limited degree of national discretion in the way in
which each of these options may be applied, to adapt the
standards to different conditions of national markets.
These features, however, will necessitate
substantial efforts by national authorities to ensure
sufficient consistency in application.
Committee intends to monitor and review the application
of the Framework in the period ahead with a view to
achieving even greater consistency.
particular, its Accord
Implementation Group (AIG) was established to
promote consistency in the Framework’s application by
encouraging supervisors to exchange information on
The Committee has also
recognised that home country supervisors have an
important role in leading the enhanced cooperation
between home and host country supervisors that will be
required for effective implementation.
is developing practical
arrangements for cooperation and coordination that
reduce implementation burden on banks and conserve
Based on the work
of the AIG, and based on its interactions with
supervisors and the industry, the Committee has issued
general principles for the cross-border implementation
of the revised Framework and more focused principles for
the recognition of operational risk capital charges
under advanced measurement approaches for home and host
It should be stressed that the
revised Framework is designed to establish minimum
levels of capital for internationally active banks.
As under the 1988
Accord, national authorities will be free to adopt
arrangements that set higher levels of minimum capital.
Moreover, they are free to put in place
supplementary measures of capital adequacy for the
banking organisations they charter.
authorities may use a supplementary capital measure as a
way to address, for example, the potential uncertainties
in the accuracy of the measure of risk exposures
inherent in any capital rule or to constrain the extent
to which an organisation may fund itself with debt.
Where a jurisdiction
employs a supplementary capital measure (such as a
leverage ratio or a large exposure limit) in conjunction
with the measure set forth in this Framework, in some
instances the capital required under the supplementary
measure may be more binding.
generally, under the second pillar, supervisors should
expect banks to operate above minimum regulatory capital
The revised Framework is
more risk sensitive than the
1988 Accord, but countries where risks in the
local banking market are relatively high nonetheless
need to consider if banks should be required to hold
additional capital over and above the Basel minimum.
This is particularly the case with the more broad
brush standardised approach, but, even in the case of
the internal ratings-based (IRB) approach, the risk of
major loss events may be higher than allowed for in this
The Committee also wishes to highlight
the need for banks and
supervisors to give appropriate attention to the second
(supervisory review) and third (market discipline)
pillars of the revised Framework.
critical that the minimum capital requirements of the
first pillar be accompanied by a robust implementation
of the second, including efforts by banks to assess
their capital adequacy and by supervisors to review such
In addition, the disclosures
provided under the third pillar of this Framework will
be essential in ensuring that market discipline is an
effective complement to the other two pillars.
The Committee is aware that interactions between
regulatory and accounting approaches at both the
national and international level can have significant
consequences for the comparability of the resulting
measures of capital adequacy and for the costs
associated with the implementation of these approaches.
The Committee believes that its decisions with
respect to unexpected and
expected losses represent a major step forward in
The Committee and its members
intend to continue playing a pro-active role in the
dialogue with accounting authorities in an effort to
reduce, wherever possible, inappropriate disparities
between regulatory and accounting standards.
revised Framework presented here reflects several
significant changes relative to the Committee’s most
recent consultative proposal in
number of these changes have already been described in
the Committee’s press statements of
October 2003, January 2004
and May 2004.
These include the changes
in the approach to the treatment
of expected losses (EL) and unexpected losses (UL) and
to the treatment of securitisation exposures.
n addition to these, changes in the treatments
of credit risk mitigation and qualifying revolving
retail exposures, among others, are also being
The Committee also has sought to
clarify its expectations regarding the need for banks
using the advanced IRB
approach to incorporate the effects arising from
economic downturns into their loss-given-default
The Committee believes
it is important to reiterate
its objectives regarding the overall level of minimum
These are to
broadly maintain the aggregate level of such
requirements, while also providing incentives to adopt
the more advanced risk-sensitive approaches of the
To attain the objective,
the Committee applies a
scaling factor to the risk-weighted asset amounts for
credit risk under the IRB approach.
current best estimate of the scaling factor using
quantitative impact study data is 1.06. National
authorities will continue to monitor capital
requirements during the implementation period of the
revised Framework. Moreover, the Committee will monitor
national experiences with the revised Framework.
The Committee has designed the revised Framework to be a
more forward-looking approach to capital adequacy
supervision, one that has the capacity to evolve with
is necessary to ensure that the Framework keeps pace
with market developments and advances in risk management
practices, and the Committee intends to monitor these
developments and to make revisions when necessary.
In this regard, the Committee has
benefited greatly from its
frequent interactions with industry participants and
looks forward to enhanced opportunities for dialogue.
The Committee also intends to keep the
industry apprised of its future work agenda.
July 2005, the Committee published additional guidance
in the document The Application of Basel II to Trading
Activities and the Treatment of Double Default Effects.
That guidance was developed jointly with the
International Organization of
Securities Commissions (IOSCO) and demonstrates
the capacity of the revised Framework to evolve with
It refined the treatments of counterparty
credit risk, double default effects, shortterm maturity
adjustment and failed transactions, and improved the
trading book regime.
One area where the Committee
intends to undertake additional work of a longerterm
nature is in relation to the definition of eligible
motivation for this is the fact that the changes in the
treatment of expected and unexpected losses and related
changes in the treatment of provisions in the Framework
set out here generally tend to reduce Tier 1 capital
requirements relative to total capital requirements.
Moreover, converging on a uniform
international capital standard under this Framework will
ultimately require the identification of an agreed
set of capital instruments that are available to absorb
unanticipated losses on a going-concern basis.
The Committee announced its intention to
review the definition of
capital as a follow-up to the revised approach to Tier 1
eligibility as announced in its October 1998 press
release, “Instruments eligible for inclusion in Tier 1
It will explore further issues
surrounding the definition of regulatory capital, but
does not intend to propose changes as a result of this
longer-term review prior to the implementation of the
revised Framework set out in this document.
the meantime, the Committee will continue its efforts to
ensure the consistent application of its 1998 decisions
regarding the composition of regulatory capital across
Financial Stability Board (FSB) was established
in April 2009 as the successor to the Financial
Stability Forum (FSF).
The FSF was founded in 1999 by the G7 Finance
Ministers and Central Bank Governors following
recommendations by Hans Tietmeyer, President of the
G7 Ministers and Governors
had commissioned Dr Tietmeyer to recommend new
structures for enhancing cooperation among the various
national and international supervisory bodies and
international financial institutions so as to promote
stability in the international financial system.
He called for the creation of a Financial Stability
G7 Ministers and Governors endorsed the
creation of the FSF at a meeting in Bonn in February
The FSF would
- National authorities
responsible for financial stability in significant
international financial centres, namely treasuries,
central banks, and supervisory agencies;
Sector-specific international groupings of regulators
and supervisors engaged in developing standards and
codes of good practice; international financial
institutions charged with surveillance of domestic and
international financial systems and monitoring and
fostering implementation of standard;
Committees of central bank experts concerned with market
infrastructure and functioning.
2008, the Leaders of the G20 countries called for a
larger membership of the FSF.
A broad consensus
emerged in the following months towards placing the FSF
on stronger institutional ground with an expanded
membership - to strengthen its effectiveness as a
mechanism for national authorities, standard setting
bodies and international financial institutions to
address vulnerabilities and to develop and implement
strong regulatory, supervisory and other policies in the
interest of financial stability.
As announced in
the G20 Leaders Summit of April 2009, the expanded FSF
was re-established as the Financial Stability Board
(FSB) with a broadened mandate to promote financial
What is important: The G20 leaders endorse
the Basel ii framework
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