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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