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.