Bernard Szlachta: /* More factual */

2012-11-24T07:18:32Z

More factual

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{{Cat|OCEB B200.5 - Quality and GRC}}
Source: http://www.bis.org/publ/bcbs107.pdf
== Basel Accords ==
* banking supervision Accords
* recommendations on banking regulations (Basel I, Basel II and Basel III)
* issued by the Basel Committee on Banking Supervision
* secretariat at the Bank for International Settlements in Basel (BIS), Switzerland

== Which bank must comply ==
* $250B of total assets or $10B of foreign assets
* Basel II compliance is optional for all others
* examiners can require compliance on a case-by-case basis

== Basel Accords History ==
* 1988 - Basel (I)
* 2004 - Basel II (covered in OCEB v1)
* 2010 - Basel III (covered in OCEB v2)

== Basel II goals ==
* Ensuring that capital allocation is more risk sensitive;
* Enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution
* Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques
* Attempting to align '''economic''' and '''regulatory capital''' more closely to reduce the scope for regulatory arbitrage

== Pillars==
# Minimum capital requirements (addressing risk)
# Supervisory review
# Market discipline

=== First pillar===
Regulatory capital is calculated for three major components of risk.
# credit risk
# operational risk
# market risk

; Credit risk
* can be calculated using:
** standardized approach
* Foundation Internal Rating-Based Approach (IRB)
* Advanced IRB
* General IB2 Restriction

; Operational risk]
* Basic indicator approach (BIA)
* Standardized approach (STA)
* Internal measurement approach (advanced measurement approach - AMA).

; Market risk]]
* Value at risk (VaR)

=== Second pillar===
Deals with the regulatory response to the first pillar
Provides a framework for dealing with other risks (residual risk):
* Systemic risk
* Pension risk
* Concentration risk
* Strategic risk
* Reputational risk
* Liquidity risk
* Legal risk.

The result of this pillar: Internal Capital Adequacy Assessment Process (ICAAP)

=== Third pillar===
* Complements the minimum capital requirements and supervisory review process
* Develops a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution

; Market discipline
* supplements regulation as sharing of information facilitates assessment of the bank by others including investors, analysts, customers, other banks and rating agencies which leads to good corporate governance
* Market discipline operates by requiring institutions to disclose details on the scope of application, capital, risk exposures, risk assessment processes and the capital adequacy of the institution
* Must be consistent with how the senior management including the board assess and manage the risks of the institution.

; Market Participant assessment
* If market participants have a sufficient understanding of a bank's activities and the controls it has in place to manage its exposures,
* they are better able to distinguish between banking organisations so that they can reward those that manage their risks prudently and penalise those that do not

* Disclosures are required to be made at least twice a year
* Qualitative disclosures (providing a summary of the general risk management objectives and policies ) can be made annually
* Institutions are also required to create a formal policy on what will be disclosed, controls around them along with the validation and frequency of these disclosures.
* Disclosures apply to the top consolidated level of the banking group

== External Materials ==
=== Easy to digest ===
* http://www.youtube.com/watch?v=swkq2E8mswI
* http://en.wikipedia.org/wiki/Fractional_reserve_banking

=== More factual ===
* http://www.bis.org/bcbs/basel3.htm?ql=1

BASEL - Revision history

Bernard Szlachta: /* More factual */