Overview of the New Basel Accord

This presentation examines in detail the provisions of the 'New Basel Accord'. It states that:

• Capital regulation is a useful tool to control financial instability;
• The 1988 Basel Accord did not address innovation in risk measurement and management practices;
• The Basel II Accord was a conceptual and comprehensive approach that was the result of active dialogue with individuals and organizations from countries outside the committee.

The presentation further states that the New Accord had a framework that recognized the role played by bank management and the market. It had the following features:

• A structure composed of three pillars with:
  • The first pillar outlining minimum capital requirements that would cover credit risk and operational risk;
  • The second pillar detailing the supervisory review process;
  • The third pillar focusing on market discipline.
• Reliance on bank's own assessment of risk;
• Inclusion of capital charges for operational risk;

The presentation discusses the Third Quantitative Impact Study (QIS3) that was carried out in 2002 to test the impact of Basel II.

It concludes with the following remarks:

• Although Basel II demonstrated a major improvement in capital regulation, there were a lot of challenges in its implementation.
• It had the following positive features:
  • Capital requirements were more aligned to underlying risks;
  • Transactions were more likely to be motivated by funding and credit risk management needs;
  • There was efficient allocation of capital.