BASEL Accord Back ground
The Basel Capital Accord was concluded by the Basel
Committee on Banking Supervision (BCBS) on July 15,
1988 in the Bank of International Settlements head
office located in Basel.
The accord agrees upon a minimal capital regulation
framework for internationally active commercial banks
so as to reduce the risk of the international financial
Revised Basel II was introduced in June 2006
The standardized approach sets out specific risk
weight for certain types of credit risk.
Banks that decide to adopt the standardized ratings
approach must rely on the ratings generated by
Internal Rating based Approach
The more advanced the approach, the higher is the
responsibility and the implementation cost for the
Once a bank chooses to apply an internal-ratings-
based approach for a part of its portfolio, it is expected
to extend it across the whole banking group.
For exposures in non-material business units and
asset classes, the implementation of the IRB approach
may not be cost efficient.
Following are the four key concepts of supervisory review:
Principle 1: Banks should have a process for assessing risks
profile and a strategy for maintaining their capital levels.
Principle 2: Supervisors should review and evaluate banks’
internal capital assessments and strategies as well as their
ability to monitor and ensure their compliance with regulatory
capital ratios. Supervisors should take appropriate supervisory
action if they are not satisfied with the results of this process.
Principle 3: Supervisors should expect banks to operate above
the minimum regulatory capital ratios and should have the
ability to require banks to hold capital in excess of the
Principle 4: Supervisors should seek to interfere at an early
stage to prevent capital from falling below the minimum levels
required to support the risk characteristics of a particular bank.
5 Features of ICAAP
Board and senior management oversight
Sound capital assessment
Comprehensive assessment of risks
Monitoring and reporting
Internal control review
PILLAR 3 : Disclosure towards financial market
Effective disclosure is essential to ensure that market
participants can better understand banks’ risk profiles and
the adequacy of their capital.
It is important that disclosures are transparent and easily
comparable among financial institutions such that the market
mechanisms can work efficiently.
All material information must be disclosed
Too detailed disclosure on customers, products, methodologies
or systems may weaken the competitive position of some
Types of disclosures
Qualitative disclosures providing a summary of
the general risk management objectives and
policies which can be made annually
These disclosures are required to be made at least
twice a year.