Monitoring Compliance with the Basel II Accord Charles H. Le Grand Reliability of Global Financial Infrastructures, Information, and Reporting Accountability Standards Measurement Analysis

Basel II Accord “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” Basel Committee on Banking Supervision Bank for International Settlements, Basel, Switzerland. (

Basel II Accord Objectives International convergence on regulations governing capital adequacy of internationally active banks Framework for measuring capital adequacy to strengthen the soundness and stability of the international banking system Consistency so capital adequacy regulation will not cause competitive inequality among international banks Adopt strong industry risk management practices Minimum standard for national supervisory authorities Maintain the aggregate level of minimum capital requirements and provide incentives to adopt the advanced risk-sensitive approaches of the revised Framework

Three Pillar Approach Minimum Capital Requirements Supervisory Review Market Discipline

Pillar 1 Calculation of Minimum Capital Requirements considering o Credit Risk o Operational Risk o Market Risk

Pillar 2 – Supervisory Review of Capital Adequacy – Four Key Principles 1.Banks’ process for assessing their overall capital in relation to their risk profile, and Strategy for maintaining their capital levels

Pillar 2 – Supervisory Review of Capital Adequacy – Four Key Principles 2. Review & evaluate banks’ internal capital adequacy assessments and strategies, as well as their ability to monitor and ensure compliance with regulatory capital ratios. Take appropriate supervisory action if not satisfied with the results of this process.

Pillar 2 – Supervisory Review of Capital Adequacy – Four Key Principles 3. Expect banks to operate above the minimum regulatory capital ratios, and Require banks to hold capital in excess of the minimum.

Pillar 2 – Supervisory Review of Capital Adequacy – Four Key Principles 4. Supervisor intervention at an early stage to keep capital at or above the minimum levels for the risk characteristics of a particular bank and Require a rapid remedy if capital is not maintained or restored

Pillar 3 – Market Discipline through Enhanced Public Disclosure The disclosures provided under the third pillar of this Framework will be essential Ensuring market discipline is an effective complement to the other two pillars.

Critical Infrastructure Protection (CIP) Financial Systems Energy Communications Transportation Technology Food and Water Waste Management Government Law Enforcement Peacekeeping Emergency Management and Response

Compliance Cultures Compliance Administrative Overhead o Cost / benefit of regulatory requirements (who?) o Impacts on management time and opportunities o Impacts on competition – smaller banks o Aversion to prescriptive regulations o Role of politics in regulation and supervision o Opportunity to base compliance on measures that are also relevant to management

Operational and Other Risk System and communication failures Systemic risks (cascading across organizations) eFraud – internal and external System integrations (as from mergers) and conversions – and the roles of testing Targeted attacks on institutions and/or infrastructures Purchasing and providing services The role of “innovation” and new risk instruments

Supervisor and Convergence Roles Learning from the current global financial situation Cultural change to position regulation and supervision as a benefit not a burden Reduce incentives to game the system Monitoring and analytics intelligent enough to spot dangerous schemes before they become the next catastrophe

Contact Charles H. Le Grand, CHL Global Associates 206 Sweetwater Blvd So., Longwood, FL office home mobile Skype clegrand1 TechPar Group -