Basel II: The Revised Framework of June 2004

This paper discusses the development of Basel II and its salient features. It highlights:

• A brief history of the development of Basel II;
• The objectives of the revised framework (RF) and Basel II;
• Key parts of the RF, which include:
  • Its three main pillars - minimum capital requirements, supervisory review and market discipline;
  • The calculation of minimum capital requirements, which includes the calculation of credit, market and operational risk;
  • The two approaches to the measurement of credit risk;
  • The three approaches to the measurement of operational risk.

The paper lists the following four principles on which the second pillar of the RF - the supervisory review - is based. They concern:

• Banks' processes for evaluating their capital in relation to their risks;
• Supervisor's assessment of these processes and their capacity to take action as necessary;
• Supervisors' expectations that banks will have capital in excess of that prescribed by minimum regulatory ratios;
• The need for supervisors to intervene to prevent banks' capital from falling below minimum.

The paper also discusses:

• Pillar 3, which deals with the need for transparency;
• Consolidated supervision and cross-border supervisory cooperation;
• Expectations about the pace and requirements of implementation of Basel II.

It concludes with:

• The Basel Committee on Banking Supervision's (BCBS) responses to comments;
• A list of some outstanding issues.