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Tuesday, 23rd April 2024
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Basel II finalised at last Back  
After years of discussion and consultation, the Basel II process came to an end on June 26th, when the Bank for International Settlements (BIS) published the final version of the capital adequacy framework. Entitled ‘International Convergence of Capital Measurement and Capital Standards: a Revised Framework’, the Accord marks the first significant overhaul of the capital structure of banks since the 1988 Basel Capital Accord.
EEntitled ‘International Convergence of Capital Measurement and Capital Standards: a Revised Framework’, the Accord marks the first significant overhaul of the capital structure of banks since the 1988 Basel Capital Accord.

The new Accord builds on the 1988 one’s basic structure for setting capital requirements and improves the capital framework’s sensitivity to the risks that banks actually face. The Basel Committee say that this will be achieved in part by aligning capital requirements more closely to the risk of credit loss and by introducing a new capital charge for exposures to the risk of loss caused by operational failures.

However, the Basel Committee intends to maintain broadly the aggregate level of minimum capital requirements, while providing incentives to adopt the more advanced risk-sensitive approaches of the revised framework. Basel II combines these minimum capital requirements with supervisory review and market discipline to encourage improvements in risk management.

The Basel Committee intends for the new framework to be available for implementation in member jurisdictions as of year-end 2006. The most advanced approaches to risk measurement will be available for implementation as of year-end 2007, in order to allow banks and supervisors to benefit from an additional year of impact analysis or parallel capital calculations under the existing and new rules.

The EU plans to introduce a Directive on the Accord, a draft of which should be made available in July. In the US however, the Directive is only mandatory for the largest banks.

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