The Basel Committee on Banking Supervision, established by the central bank governors of the Group of Ten countries, released the revised capital adequacy framework (commonly referred to as “Basel II”) in June 2004. The objective of Basel II is to better align minimum capital requirement of banks more closely to the risks they face. The revised framework replaces the old “one size fits all” approach on banks in regard to risk management. The revised framework under Basel II adopts a three-pillar structure which represents a major step forward in terms of the identification, quantification and management of risk and public disclosure.
Pillar 1
requires banks to maintain a minimum amount of
capital for credit, market and operational risks. The new framework provides a
spectrum of approaches for banks of different levels of sophistication,
depending on their internal risk management capabilities and complexity of
operations, to calculate their minimum capital requirement.
Pillar 2
requires banks to assess the full range of risks
they run and to determine how much capital to hold against them. The banks’
capital adequacy and internal assessment process will also be reviewed for
ensuring that capital above the minimum level is held where appropriate.
Pillar 3
aims to bolster market discipline by setting out
the disclosure requirements applicable to banks in areas such as their risk
profiles, capital adequacy and internal risk management.As a general rule,
different banks with different levels of sophistication and risk exposures will
be subject to different disclosure requirements.