Basel II

What is Basel II?

Basel II is part of the Basel record. It is an international business standard that sets the regulations for financial institutions to maintain adequate cash reserves to cover risks incurred by operations. It is the second in the set of the international banking regulations put out by the Basel Committee on Bank Supervision with rules and guidelines.

Basel II broadens the rules for the minimum Capital required as established under Basel I.

Basel II says that the banks with riskier assets should have more capital on hand than those with safer assets. It also states that companies publish details of risky investments and risk management.

Three Pillars of Basel II

Basel II has three pillars minimal capital requirements, regulatory supervision and Market discipline.

Pillar 1

The minimal capital requirement takes into consideration the operational risks along with credit risks, which are associated with risk-weighted assets (RWA). It takes into account a specific asset’s risk profile with specific characteristics.

Pillar 2

Regulatory supervision takes into account the banks’ capital adequacy for covering all risks they can face in their operations. It makes sure to see whether the banks are taking the right measures and covers all risks associated.

Pillar 3

Market discipline makes it compulsory for companies to disclose their market information. This is done so that users who are Investing in these financial institutions can make relevant, informed trading decisions and ensure market discipline. It allows the public to know about the bank’s risk exposures, Risk assessment processes, among others.