What is Basel-II

Recently a new buzz word is around related to Finance and Banking "BASEL-II". In banks and financial institution, people keep talking about Basel-II, such and such financial institution or bank is Basel-II compliant. What is all about this new word? What is Basel-II. What does this mean. How does it impact the Finance and Banking industry. As its name suggest that its a sequel of BASEL-I, Here is the consolidated information in a nut-shell you need to know.



The first standard, (Basel-I) was published in 1988. Basel-I is commonly known as "Basel Capital Accord"



BASEL I

Basel I was an international accord to set minimum levels of capital for banks, building societies and other deposit taking institutions. It was designed to create a level playing field for lenders from different countries and to ensure that lenders were sufficiently well capitalised to protect depositors and the financial system.




BASEL II (Neede for Financial Security Measurement)
After 11th Sep 2001 disaster, A committee of Governers of Central banks of 10 nations (G10) for providing a framework for finantial regulations, whose headoffice is in Basel, Switzerland have provided a framework recently, named as Basel-II.

Definition

International Convergence of Capital Measurement and Capital Standards: a revised framework a.k.a "Basel-II Framework" -> Offers a new set of standards for estabilishing a minimum capital requirements for banking organizations.


Following are the 3 pillers of Basel-II framework

1. Minimum capital requirement (form Basel Accord) - requires lenders to assess their market and operational risk and provide capital to cover such risk. The simplest is the standardised approach, which provides risk weights for some asset classes and requires the weight on others to be determined by the public credit rating assigned to the particular asset by the rating agencies.
2. Supervisory Review - lenders are required to assess risks to their business. For example -risk caused by interest rate mismatches between assets and liabilities.
3. Market Discipline - requires lenders to publish information on their approach to risk management and is designed to raise standards through greater transparency.

Difference Between BASEL-I and BASEL-II

Basel I required lenders to calculate a minimum level of capital based on a single risk weight for each of a limited number of asset classes, eg, mortgages, consumer lending, corporate loans, exposures to sovereigns. Basel II goes well beyond this, allowing some lenders to use their own risk measurement models to calculate required regulatory capital whilst seeking to ensure that lenders establish a culture with risk management at the heart of the organisation up to the highest managerial level

For further detail...see this link http://www.bis.org/press/p040626.htm