The ability of a bank to absorb unexpected shocks and losses rests on its capital base. Basel II norms are centered on sustain economic development over the long haul and include
(1) promotion of safety and soundness in the financial systems,
(2) the enhancement of competitive equality, and
(3) the constitution of more comprehensive approach to address risk.
The new proposal is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risk that banks face and realign the regulatory capital more closely with the underlying risk.
Each of these three pillars has risk mitigation as its central plank. The new risk sensitive approach seeks to strengthen the safety and soundness of the industry by focusing on:
(1) promotion of safety and soundness in the financial systems,
(2) the enhancement of competitive equality, and
(3) the constitution of more comprehensive approach to address risk.
The new proposal is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risk that banks face and realign the regulatory capital more closely with the underlying risk.
Each of these three pillars has risk mitigation as its central plank. The new risk sensitive approach seeks to strengthen the safety and soundness of the industry by focusing on:
- Risk-based capital (Pillar 1) - assessment of minimum capital requirement for banks
- Risk-based supervision (Pillar 2) - supervision to review bank's capital adequacy and internal assessment process
- Risk disclosure and encourage to enforce market discipline (Pillar 3) - use of market discipline for greater transparency and disclosure and encouraging best international practice
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