The principle changes in the New Basle II Accord are enumerated here below 1

The principle changes in the new basle ii accord are

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The principle changes in the New Basle II Accord are enumerated here below: 1. Banks are granted a greater flexibility, to determine the appropriate level of capital to be held in reserve against their risk exposure. 2. However, linked to this flexibility banks must carry a greater responsibility to have effective and supervised systems to determine capital requirements. 3. Also carry a greater responsibility to their requirements to disclose their approaches and processes, which are applied to measure the required capital. These principles are incorporated into the framework of the new approach, which is supported by the 3 pillars of Basle. A description of the 3 pillars will be briefly described in paragraph 1.3. The Basel Committee was established by the central bank Governors of the Group of “Ten countries” at the end of 1974. The task of the Committee is to formulate “ broad supervisory standard and guidelines ” and “ recommends statements of best practice ” in expectation, that individual authorities will take steps to implement them through detailed arrangements, which are best suited to their own national systems. The Committee does not possess any formal supranational supervisory authority , and its conclusions do not, and were never intended to, have legal force. 7
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1.3 The three pillars- main elements of the new Accord Figure 1. The structure of Basel II Figure 1 is a graphical representation of the New Capital Accord, Basle II. The Framework of the new accord is supported by the three pillars of Basle II. The three pillars are described as follow: Pillar 1- minimum capital requirements: This pillar describes the capital requirements for credit risk, market risk and operational risk. Pillar 2- supervisory approach: This pillar aims to encourage banks to develop better methods to measure the risks. Pillar 3- disclosure: The 3rd pillar sets out disclosure requirements and recommendations. 1.3.1 Pillar 1- Minimum capital requirements There are three kinds of risks which are within the reach of the first pillar, namely: credit risk, market and the operational risk. Credit risk: This is the risk of a loss for the bank due to the financial failure of a second party (company) to meet its contractual debt obligations towards the bank. Basel II distinguishes two kinds of methods to measure credit risk: The standardized Approach. The Internal rating based (IRB) approach, this can be divided into two approaches: o The Foundation Internal Rating Based Approach o The Advanced Internal Rating Based Approach The Internal rating based approach is more sophisticate than The Standardized Approach. The Advanced Internal Rating Approach is the most sophisticated approach within the IRB methods.
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