Free Accounting Dissertations - Alongside, The Framework Is Also Applicable To All Internationally Active
Alongside, the framework is also applicable to all internationally active banks at every tier of the banking group.
Apart from the aforementioned statements one of the principal objectives of the Basel II Accord is to protect the interest of the depositors essentially to ensure that capital recognised capital adequacy measures is readily available for the depositors. Apparently, these measures are aimed to establish a common platform for international banking and cross border finance across the globe.
The scope of application extends to the following segments of the international banking and finance entities.
Banking, securities and other financial subsidiaries
Significant minority investments in banking securities
Insurance entities
Significant investment in commercial entities.
Deduction of investment pursuant to this part
The aforementioned entities are obtained from the Basel Committee report on International Convergence of Capital Measurement and Capital Standards, published in June 2004. The Basel II accord overview is based on this report. The illustration in the fig 1 gives a clear picture of the overall scope of application of the Basel II accord.
The Basel II accord is split into three pillars.
The first Pillar: Minimum Capital Requirements
This is the very important pillar of the Basel II Accord. This pillar has very clear definitions of the Accord’s application on the credit risks and operational risk along with the Trading Book issues that are vital for international banking establishment.
The layout in fig 2 reproduced from the Basel II report provides the inner picture of the First Pillar.
The following subsections provide a detailed analysis on the elements shown in fig 2.
2.4: The First Pillar
The First pillar lays down the minimum capital requirements that every internationally active bank should incorporate. It is split into the following subsection.
2.4.1: Calculation of Minimum capital requirements
The minimum capital requirement is calculated as a measure of the capital ration. The capital ratio in turn is calculated using the regulatory capital and risk-weighted assets. The requirement of this criterion is that the capital ration must be a minimum of 8% or more in order to be eligible for the international activities. Also, in case of a two tier system the capital in tier 2 must not be greater than the tier 1 capital (i.e.) the tier 2 capital can be a maximum of 100% of the tier 1 capital. The capital is accounted from the following sources
Regulatory capital: The minimum accounting capital requirements for the financial institution encompasses the regulatory capital.
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