What is the Basel II framework?

Basel II is the second of three Basel Accords. It is based on three main “pillars”: minimum capital requirements, regulatory supervision, and market discipline. Minimum capital requirements play the most important role in Basel II and obligate banks to maintain certain ratios of capital to their risk-weighted assets.

What are risk-weighted assets example?

The capital requirement is based on a risk assessment for each type of bank asset. For example, a loan that is secured by a letter of credit is considered to be riskier and thus requires more capital than a mortgage loan that is secured with collateral.

How do you calculate RWA for credit risk?

Calculating risk-weighted assets Banks calculate risk-weighted assets by multiplying the exposure amount by the relevant risk weight for the type of loan or asset. A bank repeats this calculation for all of its loans and assets, and adds them together to calculate total credit risk-weighted assets.

What does the second pillar of Basel II describes?

The Pillar 2 supervisory review process is an integral part of the Basel Framework. It is intended to ensure that banks not only have adequate capital to support all the risks in their business but also develop and use better risk management techniques in monitoring and managing these risks.

What are Pillar 2 risks?

The Pillar 2 requirement (P2R) is a bank-specific capital requirement which applies in addition to, and covers risks which are underestimated or not covered by, the minimum capital requirement (known as Pillar 1). A bank’s P2R is determined on the basis of the Supervisory Review and Evaluation Process (SREP).

Is Basel II still in force?

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III.

Why Basel III is needed though there is Basel II?

The goal of Basel III is to force banks to act more prudently by improving their ability to absorb shocks arising from financial and economic stress by requiring them to maintain a much larger capital base, increasing transparency and improving liquidity.