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Part - II
BASEL II - KEY FEATURES
The main objectives of BASEL II are: -
Making capital allocation of banks more risk sensitive
Separation of Operational Risk from Credit Risk and calculation of separate capital charges for each
Ensure that Regulatory Capital requirements are more in line with Economic Capital requirements of banks
Encourage banks to use their internal systems for arriving at levels of Regulatory Capital
The Regulatory framework of BASEL II is based on three mutually reinforcing pillars outlined below: -
Pillar I: Minimum Capital Requirements
The current definition of capital as given by BASEL I and the 8% minimum capital requirement remains unchanged in the new accord. However the mechanism of calculating risk weighted assets in the New Accord is significantly different. In departing from BASEL I the New Accord proposes the following changes in measurement for the three types of risks that contributes towards capital adequacy of banks: -
Credit risk
Standardized approach
Foundation Internal Ratings Based (IRB) approach
Advanced Internal Ratings Based (IRB) approach
Market remains unchanged
Operational risk
Basic indicator approach
Standardized approach
Advanced measurement approach
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* Contributed by -
Prashant Jadhav,
2nd Year PGeMBA (Finance),
Mumbai Educational Trust (MET) Schools of Management, Mumbai.
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