In June 2004, the Basel Committee on Banking Supervision (BCBS) published the document “International Convergence of Capital Measurement and Capital Standards, a Revised Framework” (widely known as Basel II).
Basel II aims to build on a solid foundation of prudent capital regulation, supervision, and market discipline, and to enhance further risk management and financial stability.
Only 13 countries (the member countries) have the obligation to implement Basel II framework. However, many countries around the world are implementing Basel II by adopting the requirement to their needs. Almost 100 countries are implementing Basel II to some extent. The financial institutions in these countries will be required to prove compliance to Basel II requirements as per their countries’ requirements.
Implementation of Basel II requirements is a complex process, as it requires not just building models to capture risk, but also a change in the risk culture of the organization. It may also require extensive change in credit and other processes. A successful implementation of Basel II requirements may take up to 2-3 years for any bank.
The purpose of this series of posts is to provide you with an understanding of the practical considerations and steps for implementation of the three Pillars.
The series is organized as follows:
Part 1: Overview (This post)
Part 2: National Priorities and Scope of Application of Basel II
Part 3: Practical Steps for Implementing Pillar I
Part 4: Practical Steps for Implementing Pillar II
Part 5: Practical Steps for Implementing Pillar III
Part 6: Review, Resource Management, and Training needs
Before you begin with the implementation process, it is important that you acquire a conceptual understanding of the Basel II requirements. Understand the three pillars and get a feel of how they segment into different risk types, such as credit, market, operational risk, liquidity, and so on. Also, make a note of various approaches available for measuring each type of risk.
At this point it is a good idea to get some information about how well other banks have adopted Basel II and which approaches they are using. Are they complying with the minimum requirements, or have they implemented the advanced approaches? You can get part of this information by looking into the bank’s annual reports. This will give you an idea of what the industry is up to.
You should also get hold of the document containing the Basel II adaptation for your country. This should be available from your regulator.
In Part 2, we will discuss the factors to be considered in determining the application of Basel II.