Presentation on theme: "Presented by Avneesh kumar. Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel."— Presentation transcript:
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.Basel AccordsBasel Committee on Banking Supervision
Ensuring that capital allocation is more risk sensitive;capital allocation Separating operational risk from credit risk, and quantifying both;operational riskcredit risk Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrageregulatory arbitrage
Tier 1 includes equity capital and disclosed reserves, where equity capital includes instruments that can't be redeemed at the option of the holder (meaning that the owner of the shares cannot decide on his own that he wants to withdraw the money he invested and so cannot leave the bank without the risk coverage). Tier 2 capital is a measure of a bank's financial strength with regard to the second most reliable form of financial capital from a regulatory point of view., tier 2 capital is composed of supplementary capital, which is categorised as undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt.financial capitalregulatory
The first pillar deals three types major component of risks that a bank faces: 1. Credit risk ( Standardized approach, Foundation IRB, Advanced IRB) 2. Operational risk (BIA, Standardized approach, AMA) 3. Market risk ( Value at risk)
The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I.regulators It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk.systemic riskpension riskconcentration riskstrategic riskreputation riskliquidity risklegal risk
Pillar III presents a number of disclosure requirements. The objective is to raise the level of market discipline by giving external stakeholders a better understanding of banks’ capital adequacy calculations and the procedures involved.
It is a comprehensive framework that provides banking institutions stronger incentives to improve risk measurement and management and regulators to take measures to improve safety and soundness of banks by more closely linking regulatory capital requirements with banking risk. The Basel II Framework promotes a more forward-looking approach to capital supervision, and encourages banks to identify the risks they may face, today and in the future, and to develop or improve their ability to manage those risks. Enhancing transparency and accountability through publication of prudential ratios and other information regarding banks enables the public to make better decisions regarding the management and performance of the bank.