Basel II was implemented in the year 2004 by BCBS (Basel Committee on banking supervision), it was to create an international standard of banking regulations on bank’s capital to safeguard financial, operational and market risks.
It focuses on Credit risk Operational risk Market risk
Standardised approach focuses on regulatory capital with key elements of the banking risk; it helps in credit risk mitigation techniques and differentiating risk weights. Capital requirement is calculated by dividing bank asset into 5 categories Corporate Sovereign Bank Retail and Equity Risk weights are determined for each risk category and is rated by borrower’s credit rating
Focuses on probability of loan defaults and feeds data into complex probability based formula, this helps in finding risk weight and the capital amount to be held against the loan.
Estimates loss given default and other risks in prescribed formula to determine risk weight and capital charge against a loan. This was implemented in 1990 and Basel II was followed in banking industry.
Risk that occurs within the business due to lack of control process
Pillar 2 has two aspects. First aspect requires banks to assess their overall risk profile like credit concentration risk, liquidity risk, reputation and model risk. Second aspect is supervisory review processes. This analyzes overall risk and creates a higher prudential capital ratio
It requires disclosure of information on bank capital positions and risk-management processes; this is to strengthen the market.
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