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HomeLearnEconomyBasel II and Basel III Framework

Basel II and Basel III Framework

Also read Basel Committee (before reading this)

Basel II

The Basel II Framework describes a more comprehensive measure and minimum standard for capital adequacy for national supervisory authorities are now working to implement through domestic rule-making and adoption procedures. It seeks to improve on the existing rules by aligning regulatory capital requirements more closely to the underlined risks the banks face. In addition, the Basel II Framework intended to promote a more forward-looking approach to capital supervision, one that encourage banks to identify the risks they may face, today and in the future and to develop or improve their ability to manage those risks. As a result, it is intended to be more flexible and better able to evolve with advances in markets and risk management practices.
The efforts of the Basel Committee on banking supervision to revise the standard governing the capital adequacy of internationally active banks achieved a critical milestone in the publication of an agreed text in June 2004.
In Nov 2005, the committee issued an updated version of the revised framework incorporating the additional guidance set forth in the committee’s paper. The application of Basel II trading activities and the treatment of double default effects (July 2005).
On 4th July 2006, the committee issued a comprehensive version of the Basel II Framework. Solely as a matter convenience to readers, this 2004 Basel II Framework, the elements of the 1988 accord that were not revised during the Basel II process, the 1996 Amendment to the capital accord incorporate market risks, and the 2005 paper on the application of Basel II to trading activities and the treatment if double default effects. No new elements have been introduced in this compilation.

Basel III

Basel III is a comprehensive set of reform measures, developed by the Basel Committee on banking supervision, to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to :
  • improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source
  • improve risk management and governance
  • strengthen banks’ transparency and disclosures.
The reforms target:
  • bank level, or micro-prudential, regulation, which will help raise the resilience of individual banking institutions, to periods of stress.
  • macro-prudential, the system-wide risk that can build across the banking sector as well as the procyclical amplification of these risks over time.
The two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system wide shocks.
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