Part - I

One of the key issues, which will emerge from the Basel II Accord, is "a need to establish a clear accountability for data quality and ownership. The capital calculations for credit and operations risk will be completely dependent on the quality of data."

- by Price Waterhouse Coopers

Introduction

The failure of the Bankhaus Herstatt, which affected mostly the G-10 countries, signaled a need to coordinate supervisory efforts across countries and lay down minimum banking standards. The committee's efforts over the last three decades have made Basel synonymous with the best practices and standards in banking regulation and supervision. Perhaps the most far-reaching of these initiatives was the laying down of minimum capital standards in 1988, known as the Basel Capital Accord, to ensure a level playing field in terms of capital required to be maintained by internationally active banks. Though the Basel Committee has only 13 members, the fact that its capital standards were implemented by more than 100 countries points to their near universal acceptance. The Basel Committee does not possess any formal supranational supervisory authority and its conclusions do not have any legal or binding force. It merely formulates broad-based supervisory principles or strategies. However, it recommends statements of best practice, keeping in mind that individual authorities will undertake steps to implement them through detailed arrangements in a way that suits them best.

The original accord, now known as Basel-I, was quite simple and adopted a straight-forward `one size fits all approach' that does not distinguish between the differing risk profiles and risk management standards across banks. In June 1999, the Basel Committee issued a proposal for a New Capital Adequacy Framework to replace the 1988 accord. This framework, which is currently under development, is known as the second Basel Accord or, more commonly, as Basel II. Further to the proposal, the Basel Committee has from time to time been submitting consultative papers. On April 29, 2003, it submitted the third consultative paper (CP3), which has set July 31, 2003, as the cutoff date to get feedback on the same. The Basel Committee intends to finalize Basel II in the fourth quarter of 2003, allowing for implementation of the new framework in each G10 country by the end of 2006.

Next

* Contributed by -
Vipul Mittal & Saurabh Singh,
Ist Year, MBA (Global),
Institute of Management Technology (IMT), Nagpur.