Paper

Overview of the New Basel Accord

Proceedings from the "Second NIS Policy Forum on Microfinance Law and Regulation"
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This presentation examines in detail the provisions of the 'New Basel Accord'. It states that:

  • Capital regulation is a useful tool to control financial instability;
  • The 1988 Basel Accord did not address innovation in risk measurement and management practices;
  • The Basel II Accord was a conceptual and comprehensive approach that was the result of active dialogue with individuals and organizations from countries outside the committee.

The presentation further states that the New Accord had a framework that recognized the role played by bank management and the market. It had the following features:

  • A structure composed of three pillars with:
    • The first pillar outlining minimum capital requirements that would cover credit risk and operational risk;
    • The second pillar detailing the supervisory review process;
    • The third pillar focusing on market discipline.
  • Reliance on bank's own assessment of risk;
  • Inclusion of capital charges for operational risk;

The presentation discusses the Third Quantitative Impact Study (QIS3) that was carried out in 2002 to test the impact of Basel II.

It concludes with the following remarks:

  • Although Basel II demonstrated a major improvement in capital regulation, there were a lot of challenges in its implementation.
  • It had the following positive features:
    • Capital requirements were more aligned to underlying risks;
    • Transactions were more likely to be motivated by funding and credit risk management needs;
    • There was efficient allocation of capital.