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Wednesday, November 30, 2005 Bookmark Now! | Email to a friend  

What is Basel II exactly?

Basel II is a round of deliberations by central bankers from around the world, under the auspices of the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, aimed at producing uniformity in the way banks and banking regulators approach risk management across national borders. The Bank for International Settlements (often confused with the BCBS) supplies the secretariat for the BCBS and is not itself the BCBS.

An earlier accord, Basel I, adopted in 1988, is now widely viewed as outmoded.

The Basel II deliberations began in January 2001, driven largely by concern about the arbitrage issues that develop when regulatory capital requirements diverge from accurate economic capital calculations.

Basel II recommends "three pillars" - risk appraisal and control, supervision of the assets & monitoring of the financial market - to bring stability to the financial system.

Basel II implementation involves identifying credit risk, market risk, operational risk, etc. and then allocating adequate capital to cover potential loss. Technical terms involved are PD [probability of default], EL [expected loss], EAD [exposure at default], etc. calculation of which requires advanced data management with relevant

Originally published in 2001, a final version was issued in June 2004. Implementation of the Accord is expected by 2008.

The latest version also aims at: 1. Ensuring that capital allocation is risk sensitive. 2. Separating operational risk from credit risk, and quantifying both 3. Attempting to converge economic and regulatory capital.

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