Basel II: The founding principles of the reform

The new reform initiated by the Basel Committee in July 1998 aims to "align regulatory capital requirements more closely with underlying risks, and to provide banks and their supervisors with several options for the assessment of capital adequacy" (W. J. McDonough).

The reform promotes best practices in risk management, which ensures the stability and safety of the international financial system. The changes brought by the Basel II reform have significant implications for all banks:

The approach to credit risk will undergo significant changes, all firms being strongly encouraged to choose the internal rating system. In this method, the calculation of capital is based on functions built on existing credit risk management models,

Capital requirements will also be based on one or more indicators reflecting the level of operational risks faced by banks,

The introduction of the second and third pillars of the reform will incur increased prudential supervision and better market discipline.

These pillars will help to strengthen internal controls and the role of the external regulator, as financial communication and transparency requirements will increase.

The implementation of the Basel II reform in banks is likely to have a significant impact on their risk assessment models, their internal organisation, their business lines and their information systems. In practice, this reform initially requires that banks choose and implement complex risk measurement models in a short timeframe.

In the present report, Mazars presents the major principles of the Basel II reform, as developed in the June 2004 document published by the Basel Committee: "International Convergence of Capital Measurement and Capital Standards".

• CONTEXT
  
  
• BASIC PRINCIPLES OF THE REFORM
  
  
  • Scope of the Basel II accord
  • Reminder of the timeframe for Basel II
  
  
  
• FUNDAMENTALS AND LATEST CHANGES
  • First pillar: Minimum capital requirement calculation
  • Credit risk
  • Standardised Approach
  • Internal Ratings-Based Approach
  • Use of risk reduction techniques
  • Other contributions from the June 2004 modifications
  • Market risk
  • Operational risk
  • Standard Approach
  • Advanced Measurement Approach
  • Dates of implementation for the models
  • Second pillar: Prudential supervision process
  • Third pillar: Market discipline