Basel II: The Revised Framework of June 2004

What does Basel II focus upon?
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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.

About this Publication

By Cornford, A.