Overview of the New Basel Accord
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.