Basel II Compliance

The Basel Capital Accord was introduced in 1988, it placed restrictions on the exposures that banks could hold in relation to their capital base. The overall objective of the 1988 Accord was to protect both the depositors and the financial systems. This Accord took a relatively unsophisticated view of risk on various class of assets.

The new Capital Accord is development by the Basel Committee on Banking Supervision in consultation with key interested parties. This is to replace the old unsophisticated view of risk assessment on various class of assets with a more risk-sensitive framework. The Accord was finalised in June 2004.

The Objective Basel II  

To introduce a more risk-sensitive approach to the calculation of the capital that a bank needs to hold. This 'regulatory' capital is set by the Capital Ratio defined as follows;

The denominator of the above expression represents the bank's assets weighted according to the three separate type of risk.

Credit Risk is the assessment of risk by the organisation of a customer defaulting on a product or a facility.

Market Risk is the risk associated with price fluctuation in instruments such as futures, options, derivatives, gilts and Foreign Exchange etc.

Operational Risk is the risk associates with inadequate process and controls, procedures on disaster recovery, fraud and general operational exposure.

This ratio must be a minimum of 8%.

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