Overview of the New Basel Accord

Proceedings from the "Second NIS Policy Forum on Microfinance Law and Regulation"
Download 36 pages

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.